Is Ion Beam Applications (EBR:IBAB) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Ion Beam Applications SA (EBR:IBAB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ion Beam Applications

What Is Ion Beam Applications's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Ion Beam Applications had €56.7m of debt, an increase on €36.4m, over one year. However, it does have €153.9m in cash offsetting this, leading to net cash of €97.2m.

How Healthy Is Ion Beam Applications' Balance Sheet?

We can see from the most recent balance sheet that Ion Beam Applications had liabilities of €275.7m falling due within a year, and liabilities of €93.5m due beyond that. Offsetting these obligations, it had cash of €153.9m as well as receivables valued at €142.5m due within 12 months. So its liabilities total €72.8m more than the combination of its cash and short-term receivables.

Since publicly traded Ion Beam Applications shares are worth a total of €449.4m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Ion Beam Applications also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Ion Beam Applications made a loss at the EBIT level, last year, it was also good to see that it generated €40m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ion Beam Applications's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Ion Beam Applications has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ion Beam Applications actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Ion Beam Applications's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €97.2m. And it impressed us with free cash flow of €96m, being 241% of its EBIT. So is Ion Beam Applications's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Ion Beam Applications is showing 1 warning sign in our investment analysis , you should know about...

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.

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