Is Xebec Adsorption (CVE:XBC) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. (CVE:XBC) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Xebec Adsorption

How Much Debt Does Xebec Adsorption Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Xebec Adsorption had debt of CA$10.3m, up from CA$3.84m in one year. But on the other hand it also has CA$51.6m in cash, leading to a CA$41.3m net cash position.

How Healthy Is Xebec Adsorption's Balance Sheet?

The latest balance sheet data shows that Xebec Adsorption had liabilities of CA$24.0m due within a year, and liabilities of CA$13.5m falling due after that. On the other hand, it had cash of CA$51.6m and CA$34.3m worth of receivables due within a year. So it actually has CA$48.4m more liquid assets than total liabilities.

This surplus suggests that Xebec Adsorption has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xebec Adsorption has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, Xebec Adsorption reported revenue of CA$64m, which is a gain of 52%, although it did not report any earnings before interest and tax. 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$23m and booked a CA$4.2m accounting loss. With only CA$41.3m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Xebec Adsorption may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Xebec Adsorption , 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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