Is Alexium International Group (ASX:AJX) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Alexium International Group Limited (ASX:AJX) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alexium International Group

What Is Alexium International Group's Net Debt?

The chart below, which you can click on for greater detail, shows that Alexium International Group had US$2.51m in debt in June 2021; about the same as the year before. But on the other hand it also has US$2.93m in cash, leading to a US$422.3k net cash position.

How Strong Is Alexium International Group's Balance Sheet?

We can see from the most recent balance sheet that Alexium International Group had liabilities of US$1.97m falling due within a year, and liabilities of US$4.33m due beyond that. Offsetting this, it had US$2.93m in cash and US$1.37m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.00m.

Of course, Alexium International Group has a market capitalization of US$40.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Alexium International Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Alexium International Group 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 Alexium International Group wasn't profitable at an EBIT level, but managed to grow its revenue by 20%, to US$7.3m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Alexium International Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Alexium International Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$2.3m of cash and made a loss of US$1.4m. Given it only has net cash of US$422.3k, the company may need to raise more capital if it doesn't reach break-even 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Alexium International Group (1 makes us a bit uncomfortable) you should be aware of.

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.

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.

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