Is Xebec Adsorption (TSE:XBC) Weighed On By Its Debt Load?

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 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. Importantly, Xebec Adsorption Inc. (TSE:XBC) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 2022 Xebec Adsorption had CA$84.5m of debt, an increase on CA$50.4m, over one year. However, it does have CA$39.7m in cash offsetting this, leading to net debt of about CA$44.9m.

How Strong Is Xebec Adsorption's Balance Sheet?

The latest balance sheet data shows that Xebec Adsorption had liabilities of CA$154.5m due within a year, and liabilities of CA$88.6m falling due after that. Offsetting these obligations, it had cash of CA$39.7m as well as receivables valued at CA$57.2m due within 12 months. So it has liabilities totalling CA$146.3m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$88.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Xebec Adsorption would likely require a major re-capitalisation if it had to pay its creditors today. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Xebec Adsorption wasn't profitable at an EBIT level, but managed to grow its revenue by 103%, to CA$155m. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Xebec Adsorption's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CA$42m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$37m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Xebec Adsorption you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.