Imdex (ASX:IMD) Has A Rock Solid Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Imdex Limited (ASX:IMD) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Imdex

How Much Debt Does Imdex Carry?

As you can see below, at the end of June 2021, Imdex had AU$11.1m of debt, up from AU$6.12m a year ago. Click the image for more detail. However, it does have AU$58.5m in cash offsetting this, leading to net cash of AU$47.3m.

How Healthy Is Imdex's Balance Sheet?

We can see from the most recent balance sheet that Imdex had liabilities of AU$58.0m falling due within a year, and liabilities of AU$55.1m due beyond that. Offsetting this, it had AU$58.5m in cash and AU$60.6m in receivables that were due within 12 months. So it can boast AU$5.99m more liquid assets than total liabilities.

This state of affairs indicates that Imdex's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the AU$1.07b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Imdex boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Imdex grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Imdex 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Imdex has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Imdex recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Imdex has AU$47.3m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 59% over the last year. So we don't think Imdex's use of debt is risky. 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. We've identified 1 warning sign with Imdex , and understanding them should be part of your investment process.

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.

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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.