Does Intelligent Monitoring Group (ASX:IMB) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Intelligent Monitoring Group Limited (ASX:IMB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Intelligent Monitoring Group

What Is Intelligent Monitoring Group's Debt?

As you can see below, Intelligent Monitoring Group had AU$30.5m of debt at June 2022, down from AU$53.6m a year prior. However, it does have AU$7.04m in cash offsetting this, leading to net debt of about AU$23.5m.

How Strong Is Intelligent Monitoring Group's Balance Sheet?

The latest balance sheet data shows that Intelligent Monitoring Group had liabilities of AU$39.8m due within a year, and liabilities of AU$472.0k falling due after that. On the other hand, it had cash of AU$7.04m and AU$3.07m worth of receivables due within a year. So it has liabilities totalling AU$30.2m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$11.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Intelligent Monitoring Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Intelligent Monitoring Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Intelligent Monitoring Group made a loss at the EBIT level, and saw its revenue drop to AU$23m, which is a fall of 9.3%. We would much prefer see growth.

Caveat Emptor

Importantly, Intelligent Monitoring Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping AU$2.3m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized AU$3.7m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Intelligent Monitoring Group that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.