Is IBU-tec advanced materials (ETR:IBU) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that IBU-tec advanced materials AG (ETR:IBU) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for IBU-tec advanced materials

How Much Debt Does IBU-tec advanced materials Carry?

The image below, which you can click on for greater detail, shows that IBU-tec advanced materials had debt of €9.01m at the end of June 2021, a reduction from €15.0m over a year. But it also has €22.9m in cash to offset that, meaning it has €13.9m net cash.

A Look At IBU-tec advanced materials' Liabilities

Zooming in on the latest balance sheet data, we can see that IBU-tec advanced materials had liabilities of €2.89m due within 12 months and liabilities of €14.7m due beyond that. Offsetting these obligations, it had cash of €22.9m as well as receivables valued at €7.73m due within 12 months. So it can boast €13.0m more liquid assets than total liabilities.

This surplus suggests that IBU-tec advanced materials has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, IBU-tec advanced materials boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, IBU-tec advanced materials's EBIT fell a jaw-dropping 55% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine IBU-tec advanced materials's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While IBU-tec advanced materials has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, IBU-tec advanced materials burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that IBU-tec advanced materials has net cash of €13.9m, as well as more liquid assets than liabilities. Despite the cash, we do find IBU-tec advanced materials's EBIT growth rate concerning, so we're not particularly comfortable with the stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for IBU-tec advanced materials that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.