Imperial Riviera d.d (ZGSE:HIMR) Is Carrying A Fair Bit Of Debt

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.' 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. Importantly, Imperial Riviera d.d. (ZGSE:HIMR) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Imperial Riviera d.d

What Is Imperial Riviera d.d's Debt?

The chart below, which you can click on for greater detail, shows that Imperial Riviera d.d had Kn289.0m in debt in September 2020; about the same as the year before. However, it also had Kn187.2m in cash, and so its net debt is Kn101.8m.

How Healthy Is Imperial Riviera d.d's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Imperial Riviera d.d had liabilities of Kn39.5m due within 12 months and liabilities of Kn331.0m due beyond that. Offsetting this, it had Kn187.2m in cash and Kn7.92m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Kn175.4m.

Of course, Imperial Riviera d.d has a market capitalization of Kn1.09b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Imperial Riviera d.d'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.

Over 12 months, Imperial Riviera d.d made a loss at the EBIT level, and saw its revenue drop to Kn105m, which is a fall of 58%. To be frank that doesn't bode well.

Caveat Emptor

While Imperial Riviera d.d's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost Kn71m 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. Another cause for caution is that is bled Kn41m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Imperial Riviera d.d .

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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