Is IQE (LON:IQE) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 IQE plc (LON:IQE) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for IQE

What Is IQE's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 IQE had debt of UK£22.1m, up from UK£19.7m in one year. On the flip side, it has UK£15.4m in cash leading to net debt of about UK£6.73m.

How Healthy Is IQE's Balance Sheet?

According to the last reported balance sheet, IQE had liabilities of UK£70.6m due within 12 months, and liabilities of UK£58.4m due beyond 12 months. On the other hand, it had cash of UK£15.4m and UK£53.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£60.3m.

While this might seem like a lot, it is not so bad since IQE has a market capitalization of UK£298.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IQE can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, IQE made a loss at the EBIT level, and saw its revenue drop to UK£161m, which is a fall of 4.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months IQE produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at UK£12m. 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 UK£6.9m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting IQE insider transactions.

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.