Is Coremax (TWSE:4739) 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 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, Coremax Corporation (TWSE:4739) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Coremax

What Is Coremax's Net Debt?

As you can see below, Coremax had NT$2.22b of debt at September 2024, down from NT$2.68b a year prior. However, it does have NT$2.61b in cash offsetting this, leading to net cash of NT$385.0m.

How Healthy Is Coremax's Balance Sheet?

We can see from the most recent balance sheet that Coremax had liabilities of NT$2.10b falling due within a year, and liabilities of NT$1.01b due beyond that. On the other hand, it had cash of NT$2.61b and NT$901.0m worth of receivables due within a year. So it can boast NT$402.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Coremax could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Coremax boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Coremax made a loss at the EBIT level, last year, it was also good to see that it generated NT$163m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Coremax'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Coremax 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. Happily for any shareholders, Coremax actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Coremax has net cash of NT$385.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$709m, being 436% of its EBIT. So we don't think Coremax's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Coremax (1 is concerning) you should be aware of.

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.

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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.