Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies ImExHS Limited (ASX:IME) uses debt. But the more important question is: what risk does this debt create?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for ImExHS
What is ImExHS’ net debt?
You can click on the graph below for historical figures, but it shows that in December 2021, ImExHS had a debt of 2.37 million Australian dollars, an increase of 1.60 million Australian dollars, on a year. But on the other hand, he also has A$4.19 million in cash, resulting in a net cash position of A$1.82 million.
How strong is ImExHS’ balance sheet?
According to the latest published balance sheet, ImExHS had liabilities of A$7.10 million due within 12 months and liabilities of A$2.01 million due beyond 12 months. On the other hand, it had cash of A$4.19 million and A$7.01 million of receivables due within one year. So he actually has 2.09 million Australian dollars Continued liquid assets than total liabilities.
This short-term liquidity is a sign that ImExHS could probably service its debt easily, as its balance sheet is far from stretched. In short, ImExHS has a net cash position, so it’s fair to say that they don’t have a lot of debt! The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ImExHS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over 12 months, ImExHS reported revenue of A$14 million, a 24% gain, although it reported no earnings before interest and tax. The shareholders probably have their fingers crossed that she can make a profit.
So how risky is ImExHS?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And the fact is that over the past twelve months, ImExHS has been losing money in earnings before interest and taxes (EBIT). And over the same period, it had a negative free cash outflow of A$5.5 million and recorded a book loss of A$4.7 million. But at least it has A$1.82m on the balance sheet to spend on near-term growth. ImExHS’ revenue growth has shone over the past year, so it may well be able to turn a profit in due course. By investing before these profits, shareholders take on more risk in the hope of greater rewards. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. Be aware that ImExHS displays 4 warning signs in our investment analysis and 1 of them is potentially serious…
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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