Health Check: How Prudently Does Xebec Adsorption (TSE:XBC) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Xebec Adsorption Inc. (TSE:XBC) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Xebec Adsorption

What Is Xebec Adsorption's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Xebec Adsorption had CA$50.4m of debt, an increase on CA$12.5m, over one year. But on the other hand it also has CA$70.3m in cash, leading to a CA$19.8m net cash position.

A Look At Xebec Adsorption's Liabilities

We can see from the most recent balance sheet that Xebec Adsorption had liabilities of CA$51.7m falling due within a year, and liabilities of CA$49.1m due beyond that. On the other hand, it had cash of CA$70.3m and CA$31.8m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to Xebec Adsorption's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CA$443.5m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Xebec Adsorption boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Xebec Adsorption 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 Xebec Adsorption wasn't profitable at an EBIT level, but managed to grow its revenue by 31%, to CA$77m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Xebec Adsorption?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Xebec Adsorption lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$41m and booked a CA$47m accounting loss. Given it only has net cash of CA$19.8m, the company may need to raise more capital if it doesn't reach break-even soon. Xebec Adsorption's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Xebec Adsorption you should know about.

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.

When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.