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 Hazer Group Limited (ASX:HZR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Hazer Group

What Is Hazer Group's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Hazer Group had debt of AU$2.71m, up from none in one year. But on the other hand it also has AU$24.6m in cash, leading to a AU$21.9m net cash position. debt-equity-history-analysis

A Look At Hazer Group's Liabilities

The latest balance sheet data shows that Hazer Group had liabilities of AU$11.1m due within a year, and liabilities of AU$2.02m falling due after that. On the other hand, it had cash of AU$24.6m and AU$1.53m worth of receivables due within a year. So it actually has AU$13.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Hazer Group could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Hazer Group boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Hazer 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.



Over 12 months, Hazer Group reported revenue of AU$2.3m, which is a gain of 70%, 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.

So How Risky Is Hazer Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Hazer Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$1.5m and booked a AU$12m accounting loss. But the saving grace is the AU$21.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Hazer Group may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted  3 warning signs for Hazer Group  (of which 1 is potentially serious!) you should know about.

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 debt100% free, right now.

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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