Is Electra Battery Materials (CVE:ELBM) A Risky Investment?

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 Electra Battery Materials Corporation (CVE:ELBM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Electra Battery Materials

What Is Electra Battery Materials's Debt?

As you can see below, at the end of September 2021, Electra Battery Materials had CA$22.4m of debt, up from CA$6.98m a year ago. Click the image for more detail. However, it does have CA$63.4m in cash offsetting this, leading to net cash of CA$41.0m.

How Strong Is Electra Battery Materials' Balance Sheet?

According to the last reported balance sheet, Electra Battery Materials had liabilities of CA$2.11m due within 12 months, and liabilities of CA$51.7m due beyond 12 months. On the other hand, it had cash of CA$63.4m and CA$1.10m worth of receivables due within a year. So it actually has CA$10.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Electra Battery Materials could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Electra Battery Materials boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Electra Battery Materials 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.

Since Electra Battery Materials has no significant operating revenue, shareholders probably hope it will develop a valuable new mine before too long.

So How Risky Is Electra Battery Materials?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Electra Battery Materials lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$14m and booked a CA$17m accounting loss. Given it only has net cash of CA$41.0m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Electra Battery Materials is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.