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

Warren Buffett famously said, '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. As with many other companies IBC Advanced Alloys Corp. (CVE:IB) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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.

See our latest analysis for IBC Advanced Alloys

How Much Debt Does IBC Advanced Alloys Carry?

As you can see below, at the end of December 2023, IBC Advanced Alloys had US$14.7m of debt, up from US$12.5m a year ago. Click the image for more detail. However, because it has a cash reserve of US$1.77m, its net debt is less, at about US$12.9m.

A Look At IBC Advanced Alloys' Liabilities

The latest balance sheet data shows that IBC Advanced Alloys had liabilities of US$22.6m due within a year, and liabilities of US$2.22m falling due after that. Offsetting this, it had US$1.77m in cash and US$2.98m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$20.0m.

The deficiency here weighs heavily on the US$8.67m 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'd watch its balance sheet closely, without a doubt. After all, IBC Advanced Alloys would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year IBC Advanced Alloys wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$32m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, IBC Advanced Alloys still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$849k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of US$3.7m. And until that time we think this is a risky stock. 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. We've identified 4 warning signs with IBC Advanced Alloys (at least 3 which can't be ignored) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.