Is IBC Advanced Alloys (CVE:IB) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that IBC Advanced Alloys Corp. (CVE:IB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for IBC Advanced Alloys

How Much Debt Does IBC Advanced Alloys Carry?

As you can see below, at the end of June 2023, IBC Advanced Alloys had US$12.8m of debt, up from US$10.2m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

How Strong Is IBC Advanced Alloys' Balance Sheet?

According to the last reported balance sheet, IBC Advanced Alloys had liabilities of US$22.4m due within 12 months, and liabilities of US$2.97m due beyond 12 months. On the other hand, it had cash of US$83.0k and US$5.50m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$19.8m.

The deficiency here weighs heavily on the US$3.85m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, IBC Advanced Alloys would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since IBC Advanced Alloys will need earnings to service that debt. 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.

Over 12 months, IBC Advanced Alloys reported revenue of US$29m, which is a gain of 6.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months IBC Advanced Alloys produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping US$3.3m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$1.9m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. To that end, you should learn about the 5 warning signs we've spotted with IBC Advanced Alloys (including 3 which are concerning) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.