Xebec Adsorption (TSE:XBC) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Xebec Adsorption Inc. (TSE:XBC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xebec Adsorption

What Is Xebec Adsorption's Net Debt?

As you can see below, at the end of March 2021, Xebec Adsorption had CA$47.0m of debt, up from CA$2.91m a year ago. Click the image for more detail. But on the other hand it also has CA$99.9m in cash, leading to a CA$53.0m net cash position.

How Strong Is Xebec Adsorption's Balance Sheet?

We can see from the most recent balance sheet that Xebec Adsorption had liabilities of CA$49.8m falling due within a year, and liabilities of CA$45.4m due beyond that. Offsetting these obligations, it had cash of CA$99.9m as well as receivables valued at CA$38.8m due within 12 months. So it can boast CA$43.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Xebec Adsorption could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 it is future earnings, more than anything, that will determine Xebec Adsorption's ability to maintain a healthy balance sheet going forward. 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 26%, to CA$65m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Xebec Adsorption?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Xebec Adsorption had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$49m and booked a CA$40m accounting loss. Given it only has net cash of CA$53.0m, 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. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Xebec Adsorption (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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