Is Immersion (EPA:ALIMR) Using Debt In A Risky Way?

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.' 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, Immersion SA (EPA:ALIMR) does carry debt. But should shareholders be worried about its use of debt?

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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Immersion

How Much Debt Does Immersion Carry?

As you can see below, Immersion had €2.17m of debt at December 2021, down from €2.42m a year prior. But it also has €2.93m in cash to offset that, meaning it has €756.1k net cash.

How Healthy Is Immersion's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Immersion had liabilities of €5.75m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of €2.93m as well as receivables valued at €2.62m due within 12 months. So its liabilities total €204.5k more than the combination of its cash and short-term receivables.

Of course, Immersion has a market capitalization of €7.86m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Immersion 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 you can't view debt in total isolation; since Immersion will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Immersion made a loss at the EBIT level, and saw its revenue drop to €4.8m, which is a fall of 3.4%. That's not what we would hope to see.

So How Risky Is Immersion?

Although Immersion had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of €242k. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. For example, we've discovered 3 warning signs for Immersion (1 is potentially serious!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.