Is Canmax Technologies (SZSE:300390) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Canmax Technologies Co., Ltd. (SZSE:300390) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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¥1.77b of debt in June 2024, down from CN¥2.57b, one year before. However, its balance sheet shows it holds CN¥6.08b in cash, so it actually has CN¥4.31b net cash.

A Look At Canmax Technologies' Liabilities

We can see from the most recent balance sheet that Canmax Technologies had liabilities of CN¥2.76b falling due within a year, and liabilities of CN¥671.4m due beyond that. Offsetting this, it had CN¥6.08b in cash and CN¥1.18b in receivables that were due within 12 months. So it actually has CN¥3.83b more liquid assets than total liabilities.

This surplus suggests that Canmax Technologies is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Canmax Technologies has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Canmax Technologies's saving grace is its low debt levels, because its EBIT has tanked 86% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Canmax Technologies'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.

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. In the last three years, Canmax Technologies's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Canmax Technologies has net cash of CN¥4.31b, as well as more liquid assets than liabilities. So we are not troubled with Canmax Technologies's debt use. 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. To that end, you should be aware of the 3 warning signs we've spotted with Canmax Technologies .

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.