Is Impellam Group (LON:IPEL) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. 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.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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?

You can click the graphic below for the historical numbers, but it shows that as of July 2022 Impellam Group had UK£108.7m of debt, an increase on UK£94.9m, over one year. However, its balance sheet shows it holds UK£126.7m in cash, so it actually has UK£18.0m net cash.

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£776.7m due within 12 months and liabilities of UK£87.1m due beyond that. Offsetting these obligations, it had cash of UK£126.7m as well as receivables valued at UK£729.6m due within 12 months. So these liquid assets roughly match the total liabilities.

Since publicly traded Impellam Group shares are worth a total of UK£261.5m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Impellam Group boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Impellam Group grew its EBIT by 328% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Impellam Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Impellam Group 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. Happily for any shareholders, Impellam Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Impellam Group has UK£18.0m in net cash. The cherry on top was that in converted 160% of that EBIT to free cash flow, bringing in UK£16m. So is Impellam Group's debt a risk? It doesn't seem so to us. 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. For example - Impellam Group has 1 warning sign we think you should be aware of.

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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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.