Urbanimmersive (CVE:UI) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Urbanimmersive Inc. (CVE:UI) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Urbanimmersive

What Is Urbanimmersive's Net Debt?

The image below, which you can click on for greater detail, shows that Urbanimmersive had debt of CA$3.78m at the end of December 2021, a reduction from CA$4.19m over a year. However, because it has a cash reserve of CA$983.6k, its net debt is less, at about CA$2.79m.

How Healthy Is Urbanimmersive's Balance Sheet?

We can see from the most recent balance sheet that Urbanimmersive had liabilities of CA$1.73m falling due within a year, and liabilities of CA$3.62m due beyond that. Offsetting these obligations, it had cash of CA$983.6k as well as receivables valued at CA$243.7k due within 12 months. So it has liabilities totalling CA$4.12m more than its cash and near-term receivables, combined.

Urbanimmersive has a market capitalization of CA$16.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Urbanimmersive's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Urbanimmersive had a loss before interest and tax, and actually shrunk its revenue by 15%, to CA$4.2m. That's not what we would hope to see.

Caveat Emptor

While Urbanimmersive's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CA$1.2m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$616k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Urbanimmersive has 6 warning signs (and 3 which are a bit concerning) we think you should know about.

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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