Here's Why Xavitech (NGM:XAVI B) Can Afford Some Debt

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. Importantly, Xavitech AB (publ) (NGM:XAVI B) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Xavitech

What Is Xavitech's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Xavitech had debt of kr13.5m, up from none in one year. However, it does have kr3.24m in cash offsetting this, leading to net debt of about kr10.3m.

How Healthy Is Xavitech's Balance Sheet?

According to the balance sheet data, Xavitech had liabilities of kr14.7m due within 12 months, but no longer term liabilities. Offsetting these obligations, it had cash of kr3.24m as well as receivables valued at kr1.04m due within 12 months. So its liabilities total kr10.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Xavitech has a market capitalization of kr39.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Xavitech reported revenue of kr4.3m, which is a gain of 31%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Xavitech still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at kr2.4m. 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 kr815k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Xavitech you should be aware of, and 4 of them are a bit unpleasant.

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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