Is XTEK (ASX:XTE) Using Too Much 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. As with many other companies XTEK Limited (ASX:XTE) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for XTEK

How Much Debt Does XTEK Carry?

As you can see below, at the end of December 2021, XTEK had AU$2.90m of debt, up from AU$816.7k a year ago. Click the image for more detail. But it also has AU$4.49m in cash to offset that, meaning it has AU$1.59m net cash.

How Healthy Is XTEK's Balance Sheet?

We can see from the most recent balance sheet that XTEK had liabilities of AU$5.43m falling due within a year, and liabilities of AU$2.91m due beyond that. Offsetting this, it had AU$4.49m in cash and AU$2.15m in receivables that were due within 12 months. So its liabilities total AU$1.70m more than the combination of its cash and short-term receivables.

Since publicly traded XTEK shares are worth a total of AU$29.7m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, XTEK also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is XTEK'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 XTEK had a loss before interest and tax, and actually shrunk its revenue by 30%, to AU$27m. To be frank that doesn't bode well.

So How Risky Is XTEK?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year XTEK had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of AU$14m and booked a AU$7.3m accounting loss. With only AU$1.59m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 5 warning signs for XTEK you should be aware of, and 2 of them are a bit concerning.

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.