Aixia Group (NGM:AIXIA B) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Aixia Group AB (publ) (NGM:AIXIA B) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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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. 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.

How Much Debt Does Aixia Group Carry?

As you can see below, at the end of December 2024, Aixia Group had kr19.5m of debt, up from kr18.3m a year ago. Click the image for more detail. However, it does have kr20.3m in cash offsetting this, leading to net cash of kr839.0k.

How Healthy Is Aixia Group's Balance Sheet?

We can see from the most recent balance sheet that Aixia Group had liabilities of kr35.3m falling due within a year, and liabilities of kr15.4m due beyond that. Offsetting these obligations, it had cash of kr20.3m as well as receivables valued at kr19.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr10.5m.

Of course, Aixia Group has a market capitalization of kr155.1m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Aixia Group boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Aixia Group

Although Aixia Group made a loss at the EBIT level, last year, it was also good to see that it generated kr18m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Aixia Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Aixia Group 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 year, Aixia Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about Aixia Group's liabilities, but we can be reassured by the fact it has has net cash of kr839.0k. The cherry on top was that in converted 142% of that EBIT to free cash flow, bringing in kr26m. So is Aixia Group's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. 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 Aixia Group (including 1 which is potentially serious) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.