Is Exro Technologies (TSE:EXRO) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Exro Technologies Inc. (TSE:EXRO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Exro Technologies

What Is Exro Technologies's Net Debt?

As you can see below, at the end of June 2023, Exro Technologies had CA$11.9m of debt, up from CA$48.7k a year ago. Click the image for more detail. However, its balance sheet shows it holds CA$35.0m in cash, so it actually has CA$23.1m net cash.

How Strong Is Exro Technologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Exro Technologies had liabilities of CA$6.40m due within 12 months and liabilities of CA$18.1m due beyond that. Offsetting these obligations, it had cash of CA$35.0m as well as receivables valued at CA$338.3k due within 12 months. So it can boast CA$10.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Exro Technologies could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Exro Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Exro Technologies can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Exro Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 1,811%, to CA$4.7m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Exro Technologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Exro Technologies had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$42m of cash and made a loss of CA$42m. Given it only has net cash of CA$23.1m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Exro Technologies's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with Exro Technologies .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.