Is Implenia (VTX:IMPN) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Implenia AG (VTX:IMPN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Implenia

What Is Implenia's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Implenia had debt of CHF559.5m, up from CHF491.8m in one year. But it also has CHF720.0m in cash to offset that, meaning it has CHF160.5m net cash.

How Strong Is Implenia's Balance Sheet?

We can see from the most recent balance sheet that Implenia had liabilities of CHF1.92b falling due within a year, and liabilities of CHF725.2m due beyond that. Offsetting this, it had CHF720.0m in cash and CHF1.01b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF913.5m.

The deficiency here weighs heavily on the CHF499.8m 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, Implenia would probably need a major re-capitalization if its creditors were to demand repayment. Given that Implenia has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Implenia's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Implenia had a loss before interest and tax, and actually shrunk its revenue by 9.9%, to CHF4.0b. We would much prefer see growth.

So How Risky Is Implenia?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Implenia had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CHF222m and booked a CHF135m accounting loss. Given it only has net cash of CHF160.5m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Implenia , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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