Is MAXST (KOSDAQ:377030) Using Debt Sensibly?

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 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. Importantly, MAXST Co., Ltd. (KOSDAQ:377030) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for MAXST

What Is MAXST's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 MAXST had ₩14.5b of debt, an increase on ₩8.43b, over one year. But on the other hand it also has ₩17.7b in cash, leading to a ₩3.25b net cash position.

A Look At MAXST's Liabilities

The latest balance sheet data shows that MAXST had liabilities of ₩30.7b due within a year, and liabilities of ₩5.77b falling due after that. Offsetting this, it had ₩17.7b in cash and ₩7.95b in receivables that were due within 12 months. So it has liabilities totalling ₩10.7b more than its cash and near-term receivables, combined.

Since publicly traded MAXST shares are worth a total of ₩81.0b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MAXST boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is MAXST's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year MAXST wasn't profitable at an EBIT level, but managed to grow its revenue by 411%, to ₩13b. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is MAXST?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year MAXST had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩23b of cash and made a loss of ₩16b. Given it only has net cash of ₩3.25b, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, MAXST's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that MAXST is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com