Xebec Adsorption (TSE: XBC) has debt but no income; Should you be worried?

Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it can be obvious that you need to factor in debt, when you think about how risky a given stock is, because too much debt can sink a business. Like many other companies Xebec Adsorption Inc. (TSE: XBC) uses debt. But the real question is whether this debt makes the business risky.

When is debt a problem?

Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies constantly diluting shareholders because lenders are forcing them to raise capital at a difficult price. Of course, many companies use debt to finance growth without any negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Xebec Adsorption

What is Xebec Adsorption’s net debt?

As you can see below, at the end of March 2021, Xebec Adsorption was in debt of C $ 47.0 million, down from C $ 2.91 million a year ago. Click on the image for more details. But on the other hand, it also has C $ 99.9 million in cash, which leads to a net cash position of C $ 53.0 million.

TSX: Debt History vs. XBC Shares May 20, 2021

How strong is Xebec Adsorption’s balance sheet?

We can see from the most recent balance sheet that Xebec Adsorption had liabilities of CA $ 49.8 million due in one year and liabilities of CA $ 45.4 million beyond. In return for these obligations, he had cash of C $ 99.9 million as well as receivables valued at C $ 38.8 million due within 12 months. So he can boast of $ 43.5 million in more cash than total Liabilities.

This short-term liquidity is a sign that Xebec Adsorption could probably repay its debt with ease, as its balance sheet is far from tight. In short, Xebec Adsorption enjoys a clean cash flow, so it’s fair to say that it doesn’t have heavy debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is future profits, more than anything, that will determine Xebec Adsorption’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.

Over the past year, Xebec Adsorption was not profitable at the EBIT level, but managed to increase its revenues by 26%, to C $ 65 million. Shareholders probably crossed their fingers that this could generate a profit.

So what is the risk of adsorption of Xebec?

We are convinced that loss-making companies are, in general, riskier than profitable ones. And over the past year, Xebec Adsorption has recorded a loss before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative free cash outflow of C $ 49 million and a book loss of C $ 40 million. With only Cdn $ 53.0 million in net cash, the company may need to raise more capital if it does not hit breakeven soon. Xebec Adsorption’s revenue growth has shone over the past year, so it may well be able to turn a profit in due course. Nonprofits are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 2 warning signs with Xebec Adsorption (at least 1 which cannot be ignored), and understanding them should be part of your investment process.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in the mentioned stocks.
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