Is IBC Advanced Alloys (CVE:IB) Using Too Much Debt?

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 more important question is: how much risk is that debt creating?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for IBC Advanced Alloys

What Is IBC Advanced Alloys's Debt?

As you can see below, at the end of March 2024, IBC Advanced Alloys had US$15.0m of debt, up from US$12.0m a year ago. Click the image for more detail. However, it does have US$963.0k in cash offsetting this, leading to net debt of about US$14.1m.

How Strong 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$21.4m due within 12 months and liabilities of US$1.96m due beyond that. Offsetting this, it had US$963.0k in cash and US$4.64m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$17.8m.

This deficit casts a shadow over the US$5.89m company, like a colossus towering over mere mortals. 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.44 times and a disturbingly high net debt to EBITDA ratio of 9.5 hit our confidence in IBC Advanced Alloys like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for IBC Advanced Alloys is that it turned last year's EBIT loss into a gain of US$1.2m, over the last twelve months. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Considering the last year, IBC Advanced Alloys actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

To be frank both IBC Advanced Alloys's interest cover and its track record of staying on top of its total liabilities 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for IBC Advanced Alloys (3 are potentially serious) you should be aware of.

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.