Health Check: How Prudently Does MaxiTRANS Industries (ASX:MXI) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies MaxiTRANS Industries Limited (ASX:MXI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for MaxiTRANS Industries

What Is MaxiTRANS Industries's Debt?

The image below, which you can click on for greater detail, shows that MaxiTRANS Industries had debt of AU$23.8m at the end of December 2020, a reduction from AU$37.5m over a year. But on the other hand it also has AU$26.5m in cash, leading to a AU$2.77m net cash position.

How Healthy Is MaxiTRANS Industries' Balance Sheet?

The latest balance sheet data shows that MaxiTRANS Industries had liabilities of AU$64.3m due within a year, and liabilities of AU$90.0m falling due after that. Offsetting this, it had AU$26.5m in cash and AU$21.9m in receivables that were due within 12 months. So it has liabilities totalling AU$105.9m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$64.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, MaxiTRANS Industries would probably need a major re-capitalization if its creditors were to demand repayment. Given that MaxiTRANS Industries has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 MaxiTRANS Industries'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.

Over 12 months, MaxiTRANS Industries reported revenue of AU$339m, which is a gain of 4.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is MaxiTRANS Industries?

While MaxiTRANS Industries lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$39m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for MaxiTRANS Industries you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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