Is Xero (ASX: XRO) a risky investment?

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<p class = "Canvas Atomic Canvas Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The external one supported by Charlie Munger of Berkshire Hathaway Fund manager "The biggest investment risk is not price volatility, but whether you suffer a permanent loss of capital. Therefore, it may be obvious that you need to take debt into account when considering "how risky a stock is because too much debt can cause a company to go under." Xero Limited (ASX: XRO) makes use of debt. But is this debt a problem for shareholders? "Data-reactid =" 27 "> The external fund manager, assisted by Charlie Munger of Berkshire Hathaway, Li Lu, makes no effort when he says: & # 39; The biggest investment risk is not the volatility of It So obviously, you have to take debt into consideration when thinking about how risky a particular stock is because too much debt can make a company go under Xero Limited (ASX: XRO) makes use of debt. But is this debt a concern for shareholders?

Why do debts involve risks?

Debt and other liabilities become risky for a company if it cannot easily meet these obligations either with free cash flow or by raising capital at an attractive price. If the company is unable to meet its legal debt repayment obligations, shareholders could ultimately get away with nothing. However, a more common (but still painful) scenario is that new equity has to be raised at a low price, which will permanently dilute shareholders. The advantage of debt, of course, is that it often represents cheap capital, especially when it replaces dilution in a company that is able to reinvest with high returns. The first step in looking at a company's debt is to look at cash and debt together.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for Xero "data-reactid =" 30 "> Check out our latest analysis for Xero

What is Xero's fault?

As you can see below, Xero had debt of NZD 394.6 million at the end of September 2019, compared to NZD 391 the previous year. Click on the image for more details. However, the balance sheet shows that the company holds cash of $ 496.0 million, so it has net cash of $ 101.4 million.

ASX: XRO Historical Debt, January 6, 2020

How healthy is Xero's balance sheet?

According to the most recent balance sheet, Xero had liabilities of NZD 115.4 million that were due within 12 months and liabilities of NZD 564.9 million that were due after 12 months. Contrary to these commitments, cash and cash equivalents of NZD 496.0 million and receivables of NZD 55.4 million were due within 12 months. The company has total liabilities of NZD 128.9 million more than its cash and short-term receivables combined.

This indicates that Xero's balance sheet is fairly solid, as total liabilities are roughly equivalent to cash and cash equivalents. It is therefore very unlikely that the company does not have sufficient liquid funds at NZD 11.7 billion, but it is still worthwhile to keep an eye on the balance sheet. While there are significant liabilities, Xero also has more cash than debt. So we are pretty confident that it can safely manage its debts.

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "We also find that Xero improves its EBIT by a last year’s loss was positive NZ $ 32 million. The balance sheet is clearly the area you should focus on when analyzing debt, but ultimately the future profitability of the business will determine whether Xero can strengthen its balance sheet over time So if you want to see what the professionals think you could find this free report on earnings forecasts from analysts to be interesting. "data-reactid =" 48 "> We also note that Xero has improved its EBIT from a loss last year to a positive NZ $ 32 million. The balance sheet is clearly the area you are targeting when analyzing debt Ultimately, the future profitability of the business will determine whether Xero can strengthen its balance sheet over time, so if you want to see what the experts think, this free report on earnings forecasts by analysts may be interesting.

Finally, while the tax advisor worships book profits, lenders only accept cash. While Xero has net cash on its balance sheet, it is still worth taking a look at its ability to convert earnings before interest and taxes (EBIT) into free cash flow to understand how quickly this cash pool builds (or declines) ). In the past year, Xero recorded free cash flow of 62% of EBIT, which is roughly normal as the free cash flow is without interest and taxes. This cold, hard money means that it can reduce its debts if it wants to.

Sum up

<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We could understand whether investors over the liabilities of Xero are concerned However, we can rest assured that the company has a net present value of NZ $ 101.4 million so that we have no problems with Xero's use of debt, and we would be motivated to investigate further if we find out would be Xero Insider I recently bought shares, if you are, then you're in luck, since today we are sharing our list of reported insider deals free. "data-reactid =" 55 "> We could understand whether investors are concerned about Xero's liabilities, but we can rest assured that the company has a net cash value of NZ $ 101.4 million, so we have no problems with it Xero's use of debt, we would be motivated to further investigate the stock if we found out that Xero insiders recently bought stocks, and if you do, you're in luck as we share our list of reported insiders today free.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If after all this you are more interested in one fast growing companies with a solid balance sheet, then check out our list of net cash growth stocks without delay. "data-reactid =" 56 "> If after all of this you are more interested in a fast growing company with a solid balance sheet, then take a look at our list of stocks with net cash growth.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 57 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.