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 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 Xaar plc (LON:XAR) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.
See our latest analysis for Xaar
What Is Xaar's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Xaar had UK£1.92m of debt, an increase on UK£1.06m, over one year. But it also has UK£9.09m in cash to offset that, meaning it has UK£7.18m net cash.
How Strong Is Xaar's Balance Sheet?
The latest balance sheet data shows that Xaar had liabilities of UK£18.7m due within a year, and liabilities of UK£6.72m falling due after that. On the other hand, it had cash of UK£9.09m and UK£10.3m worth of receivables due within a year. So it has liabilities totalling UK£5.95m more than its cash and near-term receivables, combined.
Of course, Xaar has a market capitalization of UK£67.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Xaar also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Xaar's ability to maintain a healthy balance sheet going forward. 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 Xaar had a loss before interest and tax, and actually shrunk its revenue by 8.4%, to UK£65m. That's not what we would hope to see.
So How Risky Is Xaar?
Although Xaar had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£4.5m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Xaar .
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.
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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.
About LSE:XAR
Xaar
Designs, develops, manufactures, markets, and sells industrial printheads and print systems in Europe, the Middle East, Africa, Asia, and the Americas.
Good value with reasonable growth potential.