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Auditors Have Doubts About Alexium International Group (ASX:AJX)

Simply Wall St

The harsh reality for Alexium International Group Limited (ASX:AJX) shareholders is that its auditors, Grant Thornton, expressed doubts about its ability to continue as a going concern, in its reported results to June 2019. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay. Worse still, the auditor has given a qualified opinion, which is a red flag for many investors, and lenders.

Since the company probably needs cash fairly quickly, it may be in a position where it has to accept whatever terms it can get. So it is suddenly extremely important to consider whether the company is taking too much risk on its balance sheet. The biggest concern we would have is the company's debt, since its lenders might force the company into administration if it cannot repay them.

See our latest analysis for Alexium International Group

How Much Debt Does Alexium International Group Carry?

You can click the graphic below for the historical numbers, but it shows that Alexium International Group had US$6.60m of debt in June 2019, down from US$7.42m, one year before. However, it also had US$3.84m in cash, and so its net debt is US$2.75m.

ASX:AJX Historical Debt, October 5th 2019

How Healthy Is Alexium International Group's Balance Sheet?

We can see from the most recent balance sheet that Alexium International Group had liabilities of US$1.73m falling due within a year, and liabilities of US$7.44m due beyond that. On the other hand, it had cash of US$3.84m and US$962.0k worth of receivables due within a year. So it has liabilities totalling US$4.37m more than its cash and near-term receivables, combined.

Given Alexium International Group has a market capitalization of US$29.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Alexium International Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Alexium International Group had negative earnings before interest and tax, and actually shrunk its revenue by 58%, to US$5.1m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Alexium International Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$4.8m at the EBIT level. 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. However, it doesn't help that it burned through US$5.4m of cash over the last year. So in short it's a really risky stock. In any event, once you consider that the auditor has qualified their opinion, there is no way we would be interested in buying shares in this company. Since Alexium International Group may not be the best stock to buy, you may wish to see this free collection of other companies that have high ROE and low debt.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.