Does Xavitech (NGM:XAVI B) Have A Healthy Balance Sheet?

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 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 can see that Xavitech AB (publ) (NGM:XAVI B) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Xavitech

What Is Xavitech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Xavitech had kr34.1m of debt, an increase on kr13.7m, over one year. However, because it has a cash reserve of kr9.28m, its net debt is less, at about kr24.8m.

How Strong Is Xavitech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xavitech had liabilities of kr36.0m due within 12 months and liabilities of kr35.3m due beyond that. Offsetting these obligations, it had cash of kr9.28m as well as receivables valued at kr20.9m due within 12 months. So it has liabilities totalling kr41.2m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of kr44.0m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Xavitech 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.

In the last year Xavitech wasn't profitable at an EBIT level, but managed to grow its revenue by 1,706%, to kr70m. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Xavitech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at kr827k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of kr6.0m. So to be blunt we do think it is risky. 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. We've identified 5 warning signs with Xavitech (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.
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