Is IZMO (NSE:IZMO) A Risky Investment?

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. We note that IZMO Limited (NSE:IZMO) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 IZMO

What Is IZMO's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 IZMO had debt of ₹150.3m, up from ₹60.3m in one year. But on the other hand it also has ₹186.5m in cash, leading to a ₹36.2m net cash position.

How Healthy Is IZMO's Balance Sheet?

The latest balance sheet data shows that IZMO had liabilities of ₹282.4m due within a year, and liabilities of ₹114.6m falling due after that. On the other hand, it had cash of ₹186.5m and ₹172.3m worth of receivables due within a year. So it has liabilities totalling ₹38.2m more than its cash and near-term receivables, combined.

Of course, IZMO has a market capitalization of ₹1.24b, so these liabilities are probably manageable. 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, IZMO also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that IZMO grew its EBIT by 18% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. 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. During the last three years, IZMO generated free cash flow amounting to a very robust 90% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about IZMO's liabilities, but we can be reassured by the fact it has has net cash of ₹36.2m. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in ₹51m. So is IZMO's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 4 warning signs we've spotted with IZMO .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.