The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Montnets Cloud Technology Group Co., Ltd. (SZSE:002123) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Montnets Cloud Technology Group
What Is Montnets Cloud Technology Group's Debt?
As you can see below, Montnets Cloud Technology Group had CN¥1.69b of debt at September 2023, down from CN¥1.81b a year prior. However, because it has a cash reserve of CN¥1.33b, its net debt is less, at about CN¥357.7m.
A Look At Montnets Cloud Technology Group's Liabilities
According to the last reported balance sheet, Montnets Cloud Technology Group had liabilities of CN¥2.24b due within 12 months, and liabilities of CN¥209.9m due beyond 12 months. On the other hand, it had cash of CN¥1.33b and CN¥1.49b worth of receivables due within a year. So it actually has CN¥366.6m more liquid assets than total liabilities.
This surplus suggests that Montnets Cloud Technology Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Montnets Cloud Technology Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Montnets Cloud Technology Group wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to CN¥5.0b. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Despite the top line growth, Montnets Cloud Technology Group still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥17m at the EBIT level. On a more positive note, the company does have liquid assets, so it has a bit of time to improve its operations before the debt becomes an acute problem. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Montnets Cloud Technology Group you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.