Is Azelio (STO:AZELIO) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Azelio AB (publ) (STO:AZELIO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Azelio

What Is Azelio's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Azelio had kr22.7m of debt, an increase on none, over one year. But it also has kr417.0m in cash to offset that, meaning it has kr394.4m net cash.

How Healthy Is Azelio's Balance Sheet?

We can see from the most recent balance sheet that Azelio had liabilities of kr106.1m falling due within a year, and liabilities of kr32.6m due beyond that. Offsetting these obligations, it had cash of kr417.0m as well as receivables valued at kr13.2m due within 12 months. So it can boast kr291.6m more liquid assets than total liabilities.

This surplus suggests that Azelio has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Azelio 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 ultimately the future profitability of the business will decide if Azelio 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 Azelio wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to kr128m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Azelio?

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 Azelio had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through kr272m of cash and made a loss of kr197m. But at least it has kr394.4m on the balance sheet to spend on growth, near-term. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Azelio (including 1 which is is potentially serious) .

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. 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.
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