Is Electra Battery Materials (CVE:ELBM) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Electra Battery Materials Corporation (CVE:ELBM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Electra Battery Materials

What Is Electra Battery Materials's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Electra Battery Materials had CA$55.4m of debt, an increase on CA$51.8m, over one year. However, it also had CA$5.13m in cash, and so its net debt is CA$50.3m.

How Strong Is Electra Battery Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Electra Battery Materials had liabilities of CA$64.6m due within 12 months and liabilities of CA$13.5m due beyond that. Offsetting this, it had CA$5.13m in cash and CA$356.0k in receivables that were due within 12 months. So it has liabilities totalling CA$72.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CA$53.8m, we think shareholders really should watch Electra Battery Materials's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Electra Battery Materials's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

Caveat Emptor

Importantly, Electra Battery Materials had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CA$12m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CA$25m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Electra Battery Materials (2 are significant!) that you should be aware of before investing here.

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. 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.