Does Canmax Technologies (SZSE:300390) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Canmax Technologies Co., Ltd. (SZSE:300390) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Canmax Technologies

What Is Canmax Technologies's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Canmax Technologies had CN¥1.70b of debt in September 2024, down from CN¥2.55b, one year before. But it also has CN¥5.85b in cash to offset that, meaning it has CN¥4.15b net cash.

How Strong Is Canmax Technologies' Balance Sheet?

The latest balance sheet data shows that Canmax Technologies had liabilities of CN¥2.70b due within a year, and liabilities of CN¥676.6m falling due after that. Offsetting these obligations, it had cash of CN¥5.85b as well as receivables valued at CN¥998.6m due within 12 months. So it actually has CN¥3.47b more liquid assets than total liabilities.

This excess liquidity suggests that Canmax Technologies is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Canmax Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Canmax Technologies's load is not too heavy, because its EBIT was down 92% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Canmax Technologies 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Canmax Technologies 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. Over the most recent three years, Canmax Technologies recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Canmax Technologies has net cash of CN¥4.15b, as well as more liquid assets than liabilities. So we don't have any problem with Canmax Technologies's use of debt. 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. Case in point: We've spotted 3 warning signs for Canmax Technologies you should be aware of, and 1 of them makes us a bit uncomfortable.

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.