Is Xavis (KOSDAQ:254120) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Xavis Co., Ltd. (KOSDAQ:254120) does carry 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Xavis

What Is Xavis's Debt?

The image below, which you can click on for greater detail, shows that Xavis had debt of ₩3.00b at the end of September 2024, a reduction from ₩7.00b over a year. But it also has ₩7.97b in cash to offset that, meaning it has ₩4.97b net cash.

How Strong Is Xavis' Balance Sheet?

We can see from the most recent balance sheet that Xavis had liabilities of ₩9.54b falling due within a year, and liabilities of ₩701.0m due beyond that. Offsetting these obligations, it had cash of ₩7.97b as well as receivables valued at ₩5.63b due within 12 months. So it actually has ₩3.36b more liquid assets than total liabilities.

This short term liquidity is a sign that Xavis could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xavis has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Xavis grew its EBIT by 184% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Xavis will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xavis has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Xavis saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xavis has net cash of ₩4.97b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 184% over the last year. So we don't have any problem with Xavis's use of debt. 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. Be aware that Xavis is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.