Is Hazer Group (ASX:HZR) Using Debt Sensibly?

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. As with many other companies Hazer Group Limited (ASX:HZR) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 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 June 2022 Hazer Group had AU$3.67m of debt, an increase on AU$2.71m, over one year. But it also has AU$18.0m in cash to offset that, meaning it has AU$14.4m net cash.

How Healthy Is Hazer Group's Balance Sheet?

According to the last reported balance sheet, Hazer Group had liabilities of AU$12.5m due within 12 months, and liabilities of AU$2.12m due beyond 12 months. Offsetting this, it had AU$18.0m in cash and AU$8.53m in receivables that were due within 12 months. So it can boast AU$12.0m 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Hazer Group will need earnings to service that debt. 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.

Over 12 months, Hazer Group made a loss at the EBIT level, and saw its revenue drop to AU$1.2m, which is a fall of 47%. To be frank that doesn't bode well.

So How Risky Is Hazer Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$21m and booked a AU$16m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of AU$14.4m. 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Hazer Group (of which 2 are potentially serious!) you should know about.

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.