Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Mobvista Inc. (HKG:1860) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Mobvista Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Mobvista had US$114.3m of debt, an increase on US$75.5m, over one year. However, its balance sheet shows it holds US$185.4m in cash, so it actually has US$71.1m net cash.

How Healthy Is Mobvista's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Mobvista had liabilities of US$356.6m due within 12 months and liabilities of US$75.9m due beyond that. Offsetting these obligations, it had cash of US$185.4m as well as receivables valued at US$164.6m due within 12 months. So it has liabilities totalling US$82.5m more than its cash and near-term receivables, combined.

Given Mobvista has a market capitalization of US$504.3m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Mobvista also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Mobvista made a loss at the EBIT level, last year, but improved that to positive EBIT of US$20m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mobvista's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mobvista has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Mobvista actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Mobvista does have more liabilities than liquid assets, it also has net cash of US$71.1m. The cherry on top was that in converted 148% of that EBIT to free cash flow, bringing in US$30m. So we are not troubled with Mobvista's debt use. 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. We've identified 1 warning sign with Mobvista , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.