Here's Why IMCO Industries (TLV:IMCO) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, IMCO Industries Ltd. (TLV:IMCO) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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.

View our latest analysis for IMCO Industries

How Much Debt Does IMCO Industries Carry?

You can click the graphic below for the historical numbers, but it shows that IMCO Industries had ₪5.24m of debt in June 2020, down from ₪13.1m, one year before. But it also has ₪21.5m in cash to offset that, meaning it has ₪16.3m net cash.

How Healthy Is IMCO Industries's Balance Sheet?

We can see from the most recent balance sheet that IMCO Industries had liabilities of ₪57.9m falling due within a year, and liabilities of ₪13.4m due beyond that. On the other hand, it had cash of ₪21.5m and ₪45.5m worth of receivables due within a year. So its liabilities total ₪4.22m more than the combination of its cash and short-term receivables.

Since publicly traded IMCO Industries shares are worth a total of ₪85.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, IMCO Industries also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that IMCO Industries's EBIT was down 90% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is IMCO Industries'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. IMCO Industries 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. Happily for any shareholders, IMCO Industries actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about IMCO Industries's liabilities, but we can be reassured by the fact it has has net cash of ₪16.3m. And it impressed us with free cash flow of ₪13m, being 138% of its EBIT. So we don't have any problem with IMCO Industries's use of debt. 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, we've discovered 2 warning signs for IMCO Industries (1 is potentially serious!) that you should be aware of before investing here.

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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