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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, IBU-tec advanced materials AG (ETR:IBU) does carry debt. But should shareholders be worried about its use of debt?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for IBU-tec advanced materials
What Is IBU-tec advanced materials's Debt?
The image below, which you can click on for greater detail, shows that at December 2018 IBU-tec advanced materials had debt of €10.9m, up from €3.03m in one year. Net debt is about the same, since the it doesn't have much cash.
How Healthy Is IBU-tec advanced materials's Balance Sheet?
We can see from the most recent balance sheet that IBU-tec advanced materials had liabilities of €9.34m falling due within a year, and liabilities of €5.84m due beyond that. Offsetting these obligations, it had cash of €152.4k as well as receivables valued at €14.7m due within 12 months. So it has liabilities totalling €323.2k more than its cash and near-term receivables, combined.
This state of affairs indicates that IBU-tec advanced materials's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the €58.4m company is short on cash, but still worth keeping an eye on the balance sheet.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
We'd say that IBU-tec advanced materials's moderate net debt to EBITDA ratio ( being 2.4), indicates prudence when it comes to debt. And its strong interest cover of 1k times, makes us even more comfortable. Pleasingly, IBU-tec advanced materials is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 1017% gain in 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.