Warren Buffett famously said, '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. As with many other companies Hazer Group Limited (ASX:HZR) makes use of debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hazer Group

What Is Hazer Group's Debt?

As you can see below, at the end of December 2021, Hazer Group had AU$3.97m of debt, up from AU$1.07m a year ago. Click the image for more detail. But it also has AU$27.9m in cash to offset that, meaning it has AU$24.0m net cash. debt-equity-history-analysis

A Look At Hazer Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Hazer Group had liabilities of AU$13.0m due within 12 months and liabilities of AU$2.13m due beyond that. On the other hand, it had cash of AU$27.9m and AU$830.9k worth of receivables due within a year. So it can boast AU$13.6m more liquid assets than total liabilities.

This surplus suggests that Hazer Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Hazer Group has more cash than debt is arguably a good indication that it can manage its debt safely. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.



Over 12 months, Hazer Group made a loss at the EBIT level, and saw its revenue drop to AU$1.8m, which is a fall of 20%. That's not what we would hope to see.

So How Risky Is Hazer Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Hazer Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through AU$19m of cash and made a loss of AU$23m. While this does make the company a bit risky, it's important to remember it has net cash of AU$24.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the  4 warning signs  we've spotted with Hazer Group (including 1 which makes us a bit uncomfortable) .

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.

Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.