Does IZMO (NSE:IZMO) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that IZMO Limited (NSE:IZMO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for IZMO

What Is IZMO's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 IZMO had ₹112.4m of debt, an increase on ₹94.2m, over one year. But on the other hand it also has ₹361.2m in cash, leading to a ₹248.8m net cash position.

A Look At IZMO's Liabilities

We can see from the most recent balance sheet that IZMO had liabilities of ₹386.6m falling due within a year, and liabilities of ₹136.7m due beyond that. Offsetting these obligations, it had cash of ₹361.2m as well as receivables valued at ₹277.5m due within 12 months. So it can boast ₹115.3m more liquid assets than total liabilities.

This surplus suggests that IZMO has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, IZMO boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, IZMO grew its EBIT by 394% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is IZMO's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. IZMO 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. Looking at the most recent three years, IZMO recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that IZMO has net cash of ₹248.8m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 394% over the last year. So we don't think IZMO's use of debt is 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. For example, we've discovered 2 warning signs for IZMO 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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This article by Simply Wall St is general in nature. 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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