Is Urbanimmersive (CVE:UI) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Urbanimmersive Inc. (CVE:UI) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Urbanimmersive

What Is Urbanimmersive's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Urbanimmersive had debt of CA$9.69m, up from CA$3.69m in one year. However, because it has a cash reserve of CA$1.16m, its net debt is less, at about CA$8.53m.

How Healthy Is Urbanimmersive's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Urbanimmersive had liabilities of CA$6.39m due within 12 months and liabilities of CA$7.09m due beyond that. On the other hand, it had cash of CA$1.16m and CA$561.5k worth of receivables due within a year. So it has liabilities totalling CA$11.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CA$4.96m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Urbanimmersive would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Urbanimmersive 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, Urbanimmersive reported revenue of CA$11m, which is a gain of 48%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Urbanimmersive's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CA$4.2m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CA$1.6m over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for Urbanimmersive you should be aware of.

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.