Inter-M (KOSDAQ:017250) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Inter-M Corporation (KOSDAQ:017250) does carry debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Inter-M

What Is Inter-M's Net Debt?

As you can see below, Inter-M had ₩26.2b of debt at December 2020, down from ₩28.9b a year prior. On the flip side, it has ₩17.4b in cash leading to net debt of about ₩8.83b.

A Look At Inter-M's Liabilities

According to the last reported balance sheet, Inter-M had liabilities of ₩37.5b due within 12 months, and liabilities of ₩6.67b due beyond 12 months. Offsetting these obligations, it had cash of ₩17.4b as well as receivables valued at ₩12.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩14.0b.

While this might seem like a lot, it is not so bad since Inter-M has a market capitalization of ₩35.0b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is Inter-M'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.

In the last year Inter-M had a loss before interest and tax, and actually shrunk its revenue by 29%, to ₩58b. That makes us nervous, to say the least.

Caveat Emptor

While Inter-M's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩17b. 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. However, it doesn't help that it burned through ₩4.8b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Inter-M is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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