Does Impellam Group (LON:IPEL) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Impellam Group plc (LON:IPEL) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Impellam Group

What Is Impellam Group's Debt?

As you can see below, Impellam Group had UK£121.8m of debt at January 2021, down from UK£204.3m a year prior. However, it does have UK£117.9m in cash offsetting this, leading to net debt of about UK£3.90m.

How Healthy Is Impellam Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Impellam Group had liabilities of UK£575.0m due within 12 months and liabilities of UK£157.7m due beyond that. On the other hand, it had cash of UK£117.9m and UK£561.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by UK£53.6m.

Impellam Group has a market capitalization of UK£130.2m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Impellam Group will need earnings to service that debt. 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.

In the last year Impellam Group had a loss before interest and tax, and actually shrunk its revenue by 11%, to UK£2.0b. We would much prefer see growth.

Caveat Emptor

While Impellam Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping UK£22m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of UK£21m into a profit. In the meantime, we consider the stock very 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 2 warning signs with Impellam Group (at least 1 which is concerning) , and understanding them should be part of your investment process.

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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