Does IMLtd (KOSDAQ:101390) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, IM Co.,Ltd (KOSDAQ:101390) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 IMLtd

What Is IMLtd's Debt?

The image below, which you can click on for greater detail, shows that IMLtd had debt of ₩26.4b at the end of December 2020, a reduction from ₩49.7b over a year. However, because it has a cash reserve of ₩8.92b, its net debt is less, at about ₩17.5b.

How Healthy Is IMLtd's Balance Sheet?

We can see from the most recent balance sheet that IMLtd had liabilities of ₩49.0b falling due within a year, and liabilities of ₩8.48b due beyond that. Offsetting these obligations, it had cash of ₩8.92b as well as receivables valued at ₩13.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩35.6b.

This is a mountain of leverage relative to its market capitalization of ₩56.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is IMLtd'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.

In the last year IMLtd had a loss before interest and tax, and actually shrunk its revenue by 28%, to ₩146b. That makes us nervous, to say the least.

Caveat Emptor

Not only did IMLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩7.1b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩6.3b 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. 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 4 warning signs for IMLtd (of which 2 are a bit concerning!) you should know about.

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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