Does Hazer Group (ASX:HZR) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Hazer Group Limited (ASX:HZR) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Hazer Group

How Much Debt Does Hazer Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Hazer Group had AU$4.55m of debt, an increase on AU$3.97m, over one year. However, it does have AU$12.5m in cash offsetting this, leading to net cash of AU$7.91m.

How Healthy Is Hazer Group's Balance Sheet?

According to the last reported balance sheet, Hazer Group had liabilities of AU$10.5m due within 12 months, and liabilities of AU$2.27m due beyond 12 months. Offsetting this, it had AU$12.5m in cash and AU$10.3m in receivables that were due within 12 months. So it can boast AU$9.91m more liquid assets than total liabilities.

This surplus suggests that Hazer Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hazer Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Hazer 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.

Over 12 months, Hazer Group made a loss at the EBIT level, and saw its revenue drop to AU$1.7m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Hazer Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Hazer Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$18m and booked a AU$8.2m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$7.91m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 Hazer Group has 5 warning signs (and 2 which can't be ignored) we think you should know about.

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.

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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.