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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Mobicon Group Limited (HKG:1213) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Mobicon Group
What Is Mobicon Group's Net Debt?
As you can see below, at the end of March 2019, Mobicon Group had HK$96.4m of debt, up from HK$92.6m a year ago. Click the image for more detail. On the flip side, it has HK$31.7m in cash leading to net debt of about HK$64.7m.
How Strong Is Mobicon Group's Balance Sheet?
According to the last reported balance sheet, Mobicon Group had liabilities of HK$140.0m due within 12 months, and liabilities of HK$28.0k due beyond 12 months. Offsetting these obligations, it had cash of HK$31.7m as well as receivables valued at HK$62.6m due within 12 months. So its liabilities total HK$45.7m more than the combination of its cash and short-term receivables.
Given Mobicon Group has a market capitalization of HK$260.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.