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Is Elixinol Global (ASX:EXL) Using Debt Sensibly?

Simply Wall St

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 note that Elixinol Global Limited (ASX:EXL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Elixinol Global

What Is Elixinol Global's Net Debt?

The chart below, which you can click on for greater detail, shows that Elixinol Global had AU$281.0k in debt in June 2019; about the same as the year before. But on the other hand it also has AU$48.1m in cash, leading to a AU$47.9m net cash position.

ASX:EXL Historical Debt, September 19th 2019

How Strong Is Elixinol Global's Balance Sheet?

According to the last reported balance sheet, Elixinol Global had liabilities of AU$6.68m due within 12 months, and liabilities of AU$5.01m due beyond 12 months. Offsetting these obligations, it had cash of AU$48.1m as well as receivables valued at AU$4.14m due within 12 months. So it actually has AU$40.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Elixinol Global could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Elixinol Global has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Elixinol Global can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Elixinol Global managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Elixinol Global?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Elixinol Global had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through AU$43m of cash and made a loss of AU$11m. However, it has net cash of AU$48m, so it has a bit of time before it will need more capital. 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 we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Elixinol Global's profit, revenue, and operating cashflow have changed over the last few years.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.