Stock Analysis

Is IMLtd (KOSDAQ:101390) Using Too Much Debt?

KOSDAQ:A101390
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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. We can see that IM Co.,Ltd (KOSDAQ:101390) does use debt in its business. But is this debt a concern to shareholders?

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. 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.

Check out our latest analysis for IMLtd

How Much Debt Does IMLtd Carry?

As you can see below, IMLtd had ₩32.5b of debt at September 2020, down from ₩53.6b a year prior. On the flip side, it has ₩8.89b in cash leading to net debt of about ₩23.6b.

debt-equity-history-analysis
KOSDAQ:A101390 Debt to Equity History December 29th 2020

A Look At IMLtd's Liabilities

According to the last reported balance sheet, IMLtd had liabilities of ₩51.7b due within 12 months, and liabilities of ₩7.42b due beyond 12 months. On the other hand, it had cash of ₩8.89b and ₩14.4b worth of receivables due within a year. So its liabilities total ₩35.8b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩33.2b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, IMLtd made a loss at the EBIT level, and saw its revenue drop to ₩163b, which is a fall of 13%. That's not what we would hope to see.

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 ₩7.2b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of ₩2.7b over the last twelve months. So suffice it to say we consider the stock to be 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. Take risks, for example - IMLtd has 3 warning signs (and 2 which make us uncomfortable) we think 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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