Alexium International Group (ASX:AJX) Has Debt But No Earnings; Should You Worry?

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. Importantly, Alexium International Group Limited (ASX:AJX) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Alexium International Group

What Is Alexium International Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Alexium International Group had US$2.85m of debt, an increase on US$1.88m, over one year. However, it does have US$3.84m in cash offsetting this, leading to net cash of US$996.1k.

How Healthy Is Alexium International Group's Balance Sheet?

We can see from the most recent balance sheet that Alexium International Group had liabilities of US$1.67m falling due within a year, and liabilities of US$5.63m due beyond that. Offsetting these obligations, it had cash of US$3.84m as well as receivables valued at US$898.9k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.56m.

Since publicly traded Alexium International Group shares are worth a total of US$24.7m, 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, Alexium International Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Alexium International Group'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 Alexium International Group had a loss before interest and tax, and actually shrunk its revenue by 2.6%, to US$6.5m. We would much prefer see growth.

So How Risky Is Alexium International Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Alexium International Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$2.9m and booked a US$3.5m accounting loss. With only US$996.1k 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. For example, we've discovered 2 warning signs for Alexium International Group that you should be aware of before investing here.

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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