Is Imperial Metals (TSE:III) Using Debt In A Risky Way?

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. We note that Imperial Metals Corporation (TSE:III) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Imperial Metals

How Much Debt Does Imperial Metals Carry?

As you can see below, at the end of March 2021, Imperial Metals had CA$16.0m of debt, up from CA$404.0k a year ago. Click the image for more detail. But on the other hand it also has CA$30.2m in cash, leading to a CA$14.2m net cash position.

A Look At Imperial Metals' Liabilities

According to the last reported balance sheet, Imperial Metals had liabilities of CA$47.0m due within 12 months, and liabilities of CA$302.0m due beyond 12 months. On the other hand, it had cash of CA$30.2m and CA$6.71m worth of receivables due within a year. So it has liabilities totalling CA$312.0m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Imperial Metals has a market capitalization of CA$678.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Imperial Metals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Imperial Metals's earnings that will influence how the balance sheet holds up in the future. 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, Imperial Metals reported revenue of CA$153m, which is a gain of 78%, 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 Imperial Metals?

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 Imperial Metals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$60m of cash and made a loss of CA$577k. But the saving grace is the CA$14.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Imperial Metals'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. 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. For example, we've discovered 1 warning sign for Imperial Metals that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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