Hazer Group (ASX:HZR) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Hazer Group Limited (ASX:HZR) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Hazer Group

What Is Hazer Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Hazer Group had AU$2.71m of debt, an increase on none, over one year. However, its balance sheet shows it holds AU$24.6m in cash, so it actually has AU$21.9m net cash.

A Look At Hazer Group's Liabilities

The latest balance sheet data shows that Hazer Group had liabilities of AU$11.1m due within a year, and liabilities of AU$2.02m falling due after that. On the other hand, it had cash of AU$24.6m and AU$1.53m worth of receivables due within a year. So it actually has AU$13.0m 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 it is Hazer Group'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 Hazer Group wasn't profitable at an EBIT level, but managed to grow its revenue by 70%, to AU$2.3m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Hazer Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hazer Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$1.5m and booked a AU$12m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$21.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Hazer Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Hazer Group you should be aware of, and 1 of them doesn't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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