These 4 Measures Indicate That IBU-tec advanced materials (ETR:IBU) Is Using Debt Reasonably Well

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 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.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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 IBU-tec advanced materials

How Much Debt Does IBU-tec advanced materials Carry?

You can click the graphic below for the historical numbers, but it shows that IBU-tec advanced materials had €7.25m of debt in June 2022, down from €9.01m, one year before. But it also has €9.80m in cash to offset that, meaning it has €2.55m net cash.

A Look At IBU-tec advanced materials' Liabilities

According to the last reported balance sheet, IBU-tec advanced materials had liabilities of €7.01m due within 12 months, and liabilities of €11.4m due beyond 12 months. Offsetting this, it had €9.80m in cash and €8.23m in receivables that were due within 12 months. So its liabilities total €430.3k more than the combination of its cash and short-term receivables.

This state of affairs indicates that IBU-tec advanced materials' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €100.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, IBU-tec advanced materials also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although IBU-tec advanced materials made a loss at the EBIT level, last year, it was also good to see that it generated €2.4m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 year, IBU-tec advanced materials burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about IBU-tec advanced materials's liabilities, but we can be reassured by the fact it has has net cash of €2.55m. So we don't have any problem with IBU-tec advanced materials's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for IBU-tec advanced materials (1 shouldn't be ignored!) that you should be aware of before investing here.

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.