Auditors Have Doubts About IBC Advanced Alloys (CVE:IB)

When IBC Advanced Alloys Corp. (CVE:IB) reported its results to June 2022 its auditors, Crowe mackay LLP could not be sure that it would be able to continue as a going concern in the next year. Thus we can say that, based on the results to that date, the company should raise capital or otherwise raise cash, without much delay.

Given its situation, it may not be in a good position to raise capital on favorable terms. So shareholders should absolutely be taking a close look at how risky the balance sheet is. Debt is always a risk factor in these cases, as creditors could be in a position to wind up the company, in the worst case scenario.

Our analysis indicates that IB is potentially overvalued!

What Is IBC Advanced Alloys's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 IBC Advanced Alloys had US$8.14m of debt, an increase on US$7.59m, over one year. However, because it has a cash reserve of US$478.0k, its net debt is less, at about US$7.66m.

How Healthy Is IBC Advanced Alloys' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that IBC Advanced Alloys had liabilities of US$17.9m due within 12 months and liabilities of US$2.86m due beyond that. Offsetting this, it had US$478.0k in cash and US$3.63m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$16.7m.

When you consider that this deficiency exceeds the company's US$11.3m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While we wouldn't worry about IBC Advanced Alloys's net debt to EBITDA ratio of 3.9, we think its super-low interest cover of 0.28 times is a sign of high leverage. In large part that's due to the company's significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. One redeeming factor for IBC Advanced Alloys is that it turned last year's EBIT loss into a gain of US$438k, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is IBC Advanced Alloys's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, IBC Advanced Alloys burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both IBC Advanced Alloys's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. After considering the datapoints discussed, we think IBC Advanced Alloys has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. Some investors may be interested in buying high risk stocks at the right price, but we prefer to avoid a company after its auditor has expressed any uncertainty about its ability to continue as a going concern. We prefer to invest in companies that ensure the balance sheet remains healthier than that. 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. Case in point: We've spotted 3 warning signs for IBC Advanced Alloys you should be aware of, and 1 of them shouldn't be ignored.

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.