Stock Analysis

Here's Why Enermax Technology (GTSM:8093) Can Afford Some Debt

TPEX:8093
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Enermax Technology Corporation (GTSM:8093) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Enermax Technology

How Much Debt Does Enermax Technology Carry?

The image below, which you can click on for greater detail, shows that Enermax Technology had debt of NT$145.9m at the end of September 2020, a reduction from NT$178.0m over a year. However, it also had NT$53.2m in cash, and so its net debt is NT$92.6m.

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GTSM:8093 Debt to Equity History January 14th 2021

How Healthy Is Enermax Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enermax Technology had liabilities of NT$259.7m due within 12 months and liabilities of NT$33.3m due beyond that. Offsetting these obligations, it had cash of NT$53.2m as well as receivables valued at NT$79.5m due within 12 months. So it has liabilities totalling NT$160.2m more than its cash and near-term receivables, combined.

Enermax Technology has a market capitalization of NT$709.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Enermax Technology'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.

In the last year Enermax Technology wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to NT$494m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Enermax Technology managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost NT$336k 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. 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$5.4m. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Enermax Technology (1 is a bit concerning!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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