These 4 Measures Indicate That IMAX China Holding (HKG:1970) Is Using Debt Safely

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 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. We can see that IMAX China Holding, Inc. (HKG:1970) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 IMAX China Holding

What Is IMAX China Holding's Net Debt?

As you can see below, IMAX China Holding had US$3.61m of debt at December 2021, down from US$7.64m a year prior. But on the other hand it also has US$97.7m in cash, leading to a US$94.1m net cash position.

How Strong Is IMAX China Holding's Balance Sheet?

According to the last reported balance sheet, IMAX China Holding had liabilities of US$58.8m due within 12 months, and liabilities of US$37.0m due beyond 12 months. Offsetting this, it had US$97.7m in cash and US$70.3m in receivables that were due within 12 months. So it actually has US$72.1m more liquid assets than total liabilities.

It's good to see that IMAX China Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, IMAX China Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, IMAX China Holding grew its EBIT by 4,525% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if IMAX China Holding can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. IMAX China Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, IMAX China Holding's free cash flow amounted to 46% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case IMAX China Holding has US$94.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 4,525% over the last year. So we don't think IMAX China Holding's use of debt is 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. Be aware that IMAX China Holding is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.