Is ImExHS (ASX:IME) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies ImExHS Limited (ASX:IME) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for ImExHS

What Is ImExHS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 ImExHS had AU$2.37m of debt, an increase on AU$1.60m, over one year. But on the other hand it also has AU$4.19m in cash, leading to a AU$1.82m net cash position.

How Strong Is ImExHS' Balance Sheet?

According to the last reported balance sheet, ImExHS had liabilities of AU$7.10m due within 12 months, and liabilities of AU$2.01m due beyond 12 months. On the other hand, it had cash of AU$4.19m and AU$7.01m worth of receivables due within a year. So it actually has AU$2.09m more liquid assets than total liabilities.

This short term liquidity is a sign that ImExHS could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ImExHS boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ImExHS can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, ImExHS reported revenue of AU$14m, which is a gain of 24%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is ImExHS?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ImExHS lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of AU$5.5m and booked a AU$4.7m accounting loss. But at least it has AU$1.82m on the balance sheet to spend on growth, near-term. ImExHS's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ImExHS is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.