Here's Why Abonmax (TPE:2429) Can Afford Some 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.' 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, Abonmax Co., Ltd (TPE:2429) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Abonmax

What Is Abonmax's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Abonmax had debt of NT$438.8m, up from NT$373.7m in one year. However, it does have NT$192.1m in cash offsetting this, leading to net debt of about NT$246.7m.

A Look At Abonmax's Liabilities

The latest balance sheet data shows that Abonmax had liabilities of NT$383.0m due within a year, and liabilities of NT$191.7m falling due after that. Offsetting these obligations, it had cash of NT$192.1m as well as receivables valued at NT$74.8m due within 12 months. So it has liabilities totalling NT$307.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Abonmax is worth NT$767.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Abonmax's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Abonmax wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to NT$935m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Abonmax produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping NT$79m. 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. For example, we would not want to see a repeat of last year's loss of NT$158m. So we do think this stock is quite 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. To that end, you should learn about the 3 warning signs we've spotted with Abonmax (including 1 which can't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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