Stock Analysis

iZafe Group (STO:IZAFE B) Is Carrying A Fair Bit Of Debt

OM:IZAFE B
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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.' 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. We note that iZafe Group AB (publ) (STO:IZAFE B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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, 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 iZafe Group

How Much Debt Does iZafe Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 iZafe Group had kr14.0m of debt, an increase on kr7.09m, over one year. However, because it has a cash reserve of kr13.3m, its net debt is less, at about kr663.0k.

debt-equity-history-analysis
OM:IZAFE B Debt to Equity History May 2nd 2021

How Strong Is iZafe Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that iZafe Group had liabilities of kr18.4m due within 12 months and liabilities of kr1.33m due beyond that. On the other hand, it had cash of kr13.3m and kr1.22m worth of receivables due within a year. So it has liabilities totalling kr5.22m more than its cash and near-term receivables, combined.

Of course, iZafe Group has a market capitalization of kr101.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, iZafe Group has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if iZafe Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year iZafe Group had a loss before interest and tax, and actually shrunk its revenue by 70%, to kr4.7m. That makes us nervous, to say the least.

Caveat Emptor

While iZafe Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable kr29m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled kr24m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 6 warning signs for iZafe Group you should be aware of, and 2 of them are a bit concerning.

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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