Is MAX Automation (ETR:MXHN) A Risky Investment?

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. We note that MAX Automation SE (ETR:MXHN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MAX Automation

What Is MAX Automation's Debt?

As you can see below, MAX Automation had €130.9m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have €42.3m in cash offsetting this, leading to net debt of about €88.6m.

A Look At MAX Automation's Liabilities

The latest balance sheet data shows that MAX Automation had liabilities of €85.4m due within a year, and liabilities of €158.6m falling due after that. On the other hand, it had cash of €42.3m and €69.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €132.4m.

This deficit is considerable relative to its market capitalization of €144.4m, so it does suggest shareholders should keep an eye on MAX Automation's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 MAX Automation'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.

In the last year MAX Automation had a loss before interest and tax, and actually shrunk its revenue by 12%, to €356m. That's not what we would hope to see.

Caveat Emptor

Not only did MAX Automation's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €4.1m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of €16m into a profit. So in short it's a really risky stock. For riskier companies like MAX Automation I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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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