We Think XRF Scientific (ASX:XRF) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, XRF Scientific Limited (ASX:XRF) does carry debt. But the real question is whether this debt is making the company risky.

Our free stock report includes 1 warning sign investors should be aware of before investing in XRF Scientific. Read for free now.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does XRF Scientific Carry?

You can click the graphic below for the historical numbers, but it shows that XRF Scientific had AU$2.57m of debt in December 2024, down from AU$4.29m, one year before. However, it does have AU$8.13m in cash offsetting this, leading to net cash of AU$5.56m.

A Look At XRF Scientific's Liabilities

The latest balance sheet data shows that XRF Scientific had liabilities of AU$9.60m due within a year, and liabilities of AU$2.46m falling due after that. Offsetting these obligations, it had cash of AU$8.13m as well as receivables valued at AU$9.09m due within 12 months. So it can boast AU$5.16m more liquid assets than total liabilities.

This short term liquidity is a sign that XRF Scientific could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that XRF Scientific has more cash than debt is arguably a good indication that it can manage its debt safely.

View our latest analysis for XRF Scientific

Also good is that XRF Scientific grew its EBIT at 13% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine XRF Scientific's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. XRF Scientific 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. During the last three years, XRF Scientific produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that XRF Scientific has net cash of AU$5.56m, as well as more liquid assets than liabilities. And it also grew its EBIT by 13% over the last year. So we don't think XRF Scientific's use of debt is 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. We've identified 1 warning sign with XRF Scientific , and understanding them should be part of your investment process.

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. 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.