Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that MGI Tech Co., Ltd. (SHSE:688114) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does MGI Tech Carry?
The image below, which you can click on for greater detail, shows that at September 2023 MGI Tech had debt of CN¥299.6m, up from none in one year. But on the other hand it also has CN¥5.16b in cash, leading to a CN¥4.86b net cash position.
How Healthy Is MGI Tech's Balance Sheet?
The latest balance sheet data shows that MGI Tech had liabilities of CN¥1.33b due within a year, and liabilities of CN¥408.7m falling due after that. Offsetting this, it had CN¥5.16b in cash and CN¥803.1m in receivables that were due within 12 months. So it actually has CN¥4.22b more liquid assets than total liabilities.
This surplus suggests that MGI Tech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, MGI Tech boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MGI Tech's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year MGI Tech had a loss before interest and tax, and actually shrunk its revenue by 28%, to CN¥3.1b. That makes us nervous, to say the least.
So How Risky Is MGI Tech?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year MGI Tech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥2.7b of cash and made a loss of CN¥193m. With only CN¥4.86b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - MGI Tech has 1 warning sign we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.