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Is Electra Battery Materials (CVE:ELBM) Using Debt Sensibly?

·4-min read

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 Electra Battery Materials Corporation (CVE:ELBM) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Electra Battery Materials

What Is Electra Battery Materials's Debt?

As you can see below, at the end of December 2021, Electra Battery Materials had CA$23.3m of debt, up from CA$6.66m a year ago. Click the image for more detail. However, it does have CA$60.4m in cash offsetting this, leading to net cash of CA$37.1m.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Electra Battery Materials' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Electra Battery Materials had liabilities of CA$4.71m due within 12 months and liabilities of CA$62.9m due beyond that. Offsetting this, it had CA$60.4m in cash and CA$957.0k in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$6.30m.

Given Electra Battery Materials has a market capitalization of CA$149.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Electra Battery Materials also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Electra Battery Materials can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Given its lack of meaningful operating revenue, investors are probably hoping that Electra Battery Materials finds some valuable resources, before it runs out of money.

So How Risky Is Electra Battery Materials?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Electra Battery Materials had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$19m of cash and made a loss of CA$35m. With only CA$37.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Electra Battery Materials you should be aware of, and 1 of them is significant.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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