Would Max Zipper (GTSM:8932) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Max Zipper Co., Ltd. (GTSM:8932) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Max Zipper

What Is Max Zipper's Net Debt?

As you can see below, at the end of September 2020, Max Zipper had NT$303.1m of debt, up from NT$273.0m a year ago. Click the image for more detail. However, it also had NT$170.7m in cash, and so its net debt is NT$132.5m.

How Strong Is Max Zipper's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Max Zipper had liabilities of NT$504.7m due within 12 months and liabilities of NT$140.0m due beyond that. Offsetting these obligations, it had cash of NT$170.7m as well as receivables valued at NT$222.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$251.9m.

While this might seem like a lot, it is not so bad since Max Zipper has a market capitalization of NT$941.8m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Max Zipper will need earnings to service that debt. 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.

In the last year Max Zipper had a loss before interest and tax, and actually shrunk its revenue by 11%, to NT$815m. We would much prefer see growth.

Caveat Emptor

While Max Zipper'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$45m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of NT$56m. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Max Zipper (including 1 which is doesn't sit too well with us) .

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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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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