IMCO Industries (TLV:IMCO) Has Debt But No Earnings; Should You Worry?

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.' 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. As with many other companies IMCO Industries Ltd. (TLV:IMCO) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IMCO Industries

What Is IMCO Industries's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 IMCO Industries had ₪38.4m of debt, an increase on ₪8.90m, over one year. However, it does have ₪6.19m in cash offsetting this, leading to net debt of about ₪32.2m.

How Strong Is IMCO Industries' Balance Sheet?

We can see from the most recent balance sheet that IMCO Industries had liabilities of ₪106.1m falling due within a year, and liabilities of ₪23.3m due beyond that. On the other hand, it had cash of ₪6.19m and ₪72.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₪50.9m.

This deficit is considerable relative to its market capitalization of ₪54.7m, so it does suggest shareholders should keep an eye on IMCO Industries' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 IMCO Industries 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.

In the last year IMCO Industries wasn't profitable at an EBIT level, but managed to grow its revenue by 24%, to ₪209m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, IMCO Industries still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable ₪8.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪23m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for IMCO Industries you should know about.

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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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.