We Think Maxim Global Berhad (KLSE:MAXIM) Can Stay On Top Of Its Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Maxim Global Berhad (KLSE:MAXIM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Maxim Global Berhad

How Much Debt Does Maxim Global Berhad Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Maxim Global Berhad had debt of RM105.6m, up from RM8.00m in one year. But it also has RM140.0m in cash to offset that, meaning it has RM34.3m net cash.

How Healthy Is Maxim Global Berhad's Balance Sheet?

The latest balance sheet data shows that Maxim Global Berhad had liabilities of RM328.3m due within a year, and liabilities of RM127.8m falling due after that. Offsetting this, it had RM140.0m in cash and RM401.1m in receivables that were due within 12 months. So it can boast RM85.0m more liquid assets than total liabilities.

It's good to see that Maxim Global Berhad has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Maxim Global Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Maxim Global Berhad has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Maxim Global Berhad will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Maxim Global Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Maxim Global Berhad burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Maxim Global Berhad has net cash of RM34.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Maxim Global Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Maxim Global Berhad you should be aware of, and 2 of them make us 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.

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.

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