Electra Battery Materials (CVE:ELBM) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Electra Battery Materials Corporation (CVE:ELBM) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ELBM is potentially undervalued!

What Is Electra Battery Materials's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Electra Battery Materials had debt of CA$26.0m, up from none in one year. However, it does have CA$41.8m in cash offsetting this, leading to net cash of CA$15.7m.

A Look At Electra Battery Materials' Liabilities

According to the last reported balance sheet, Electra Battery Materials had liabilities of CA$11.1m due within 12 months, and liabilities of CA$47.1m due beyond 12 months. On the other hand, it had cash of CA$41.8m and CA$1.69m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$14.7m.

Of course, Electra Battery Materials has a market capitalization of CA$104.7m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Electra Battery Materials also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Electra Battery Materials 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.

Given its lack of meaningful operating revenue, investors are probably hoping that Electra Battery Materials finds some valuable resources, before it runs out of money.

So How Risky Is Electra Battery Materials?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Electra Battery Materials had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$28m of cash and made a loss of CA$16m. With only CA$15.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Electra Battery Materials (of which 1 is potentially serious!) you should know about.

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.

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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.