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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Ion Beam Applications SA (EBR:IBAB) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ion Beam Applications

What Is Ion Beam Applications's Net Debt?

The image below, which you can click on for greater detail, shows that Ion Beam Applications had debt of €48.6m at the end of June 2021, a reduction from €62.5m over a year. But it also has €145.3m in cash to offset that, meaning it has €96.7m net cash.

How Strong Is Ion Beam Applications' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ion Beam Applications had liabilities of €275.7m due within 12 months and liabilities of €88.0m due beyond that. Offsetting these obligations, it had cash of €145.3m as well as receivables valued at €120.8m due within 12 months. So its liabilities total €97.6m more than the combination of its cash and short-term receivables.

Since publicly traded Ion Beam Applications shares are worth a total of €545.0m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

It was also good to see that despite losing money on the EBIT line last year, Ion Beam Applications turned things around in the last 12 months, delivering and EBIT of €51m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ion Beam Applications 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last year, Ion Beam Applications actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €96.7m. The cherry on top was that in converted 163% of that EBIT to free cash flow, bringing in €83m. So is Ion Beam Applications's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Ion Beam Applications you should be aware of.

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.

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.

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