Is Abonmax (TWSE:2429) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Abonmax Co., Ltd (TWSE:2429) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Abonmax

What Is Abonmax's Net Debt?

The image below, which you can click on for greater detail, shows that Abonmax had debt of NT$66.1m at the end of September 2024, a reduction from NT$483.7m over a year. However, its balance sheet shows it holds NT$720.3m in cash, so it actually has NT$654.1m net cash.

A Look At Abonmax's Liabilities

According to the last reported balance sheet, Abonmax had liabilities of NT$103.8m due within 12 months, and liabilities of NT$82.0m due beyond 12 months. Offsetting this, it had NT$720.3m in cash and NT$20.5m in receivables that were due within 12 months. So it can boast NT$555.0m more liquid assets than total liabilities.

This excess liquidity suggests that Abonmax is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Abonmax boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Abonmax will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Abonmax had a loss before interest and tax, and actually shrunk its revenue by 43%, to NT$304m. That makes us nervous, to say the least.

So How Risky Is Abonmax?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Abonmax had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through NT$139m of cash and made a loss of NT$79m. While this does make the company a bit risky, it's important to remember it has net cash of NT$654.1m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 3 warning signs with Abonmax (at least 1 which is concerning) , and understanding them should be part of your investment process.

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. 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.