Is Inmax Holding (GTSM:1591) 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.' 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. Importantly, Inmax Holding Co., Ltd. (GTSM:1591) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Inmax Holding

What Is Inmax Holding's Debt?

As you can see below, Inmax Holding had NT$188.6m of debt at September 2020, down from NT$204.1m a year prior. However, it does have NT$78.1m in cash offsetting this, leading to net debt of about NT$110.5m.

A Look At Inmax Holding's Liabilities

We can see from the most recent balance sheet that Inmax Holding had liabilities of NT$241.4m falling due within a year, and liabilities of NT$17.1m due beyond that. Offsetting these obligations, it had cash of NT$78.1m as well as receivables valued at NT$83.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$97.5m.

Given Inmax Holding has a market capitalization of NT$633.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Inmax Holding's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Inmax Holding made a loss at the EBIT level, and saw its revenue drop to NT$553m, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

While Inmax Holding's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost NT$6.2m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$59m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Inmax Holding (2 can't be ignored) you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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