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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 IM Co.,Ltd (KOSDAQ:101390) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for IMLtd

What Is IMLtd's Debt?

As you can see below, at the end of September 2024, IMLtd had ₩18.3b of debt, up from ₩11.3b a year ago. Click the image for more detail. On the flip side, it has ₩7.68b in cash leading to net debt of about ₩10.6b.

How Healthy Is IMLtd's Balance Sheet?

We can see from the most recent balance sheet that IMLtd had liabilities of ₩43.6b falling due within a year, and liabilities of ₩4.19b due beyond that. On the other hand, it had cash of ₩7.68b and ₩11.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩28.7b.

Given this deficit is actually higher than the company's market capitalization of ₩25.7b, we think shareholders really should watch IMLtd's debt levels, like a parent watching their child ride a bike for the first time. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if IMLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year IMLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to ₩132b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months IMLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩5.3b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through ₩12b in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that IMLtd is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

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.