Why Xero Limited (ASX:XRO) Has Low Debt On Its Balance Sheet?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Xero Limited (ASX:XRO), with a market capitalization of AU$4.32B, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. XRO’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into XRO here. View our latest analysis for Xero

How does XRO’s operating cash flow stack up against its debt?

In the most recent balance sheet, XRO has borrowed debt capital of around NZ$3.51M made up of predominantly near term debt. With this ramp up in debt, the current cash and short-term investment levels stands at NZ$113.70M for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of XRO’s operating efficiency ratios such as ROA here.

Can XRO meet its short-term obligations with the cash in hand?

With current liabilities at NZ$65.66M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.25x. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:XRO Historical Debt Feb 21st 18
ASX:XRO Historical Debt Feb 21st 18

Does XRO face the risk of succumbing to its debt-load?

With debt at 1.62% of equity, XRO may be thought of as having low leverage. This range is considered safe as XRO is not taking on too much debt obligation, which may be constraining for future growth. XRO’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

Although XRO’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure XRO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Xero to get a better picture of the stock by looking at: