Here's Why Imperium Technology Group (HKG:776) Can Afford Some Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Imperium Technology Group Limited (HKG:776) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

See our latest analysis for Imperium Technology Group

How Much Debt Does Imperium Technology Group Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Imperium Technology Group had debt of HK$188.3m, up from HK$127.7m in one year. On the flip side, it has HK$153.5m in cash leading to net debt of about HK$34.8m.

How Healthy Is Imperium Technology Group's Balance Sheet?

We can see from the most recent balance sheet that Imperium Technology Group had liabilities of HK$233.2m falling due within a year, and liabilities of HK$51.0m due beyond that. Offsetting these obligations, it had cash of HK$153.5m as well as receivables valued at HK$43.0m due within 12 months. So its liabilities total HK$87.8m more than the combination of its cash and short-term receivables.

Given Imperium Technology Group has a market capitalization of HK$4.08b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Imperium Technology Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Imperium Technology Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Imperium Technology Group had a loss before interest and tax, and actually shrunk its revenue by 7.1%, to HK$178m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Imperium Technology Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$60m at the EBIT level. 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. However, it doesn't help that it burned through HK$75m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Imperium Technology Group has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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.

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.

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