Health Check: How Prudently Does iMedia Brands (NASDAQ:IMBI) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 iMedia Brands, Inc. (NASDAQ:IMBI) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for iMedia Brands

How Much Debt Does iMedia Brands Carry?

As you can see below, at the end of October 2021, iMedia Brands had US$120.4m of debt, up from US$52.6m a year ago. Click the image for more detail. However, it also had US$51.4m in cash, and so its net debt is US$69.1m.

A Look At iMedia Brands' Liabilities

We can see from the most recent balance sheet that iMedia Brands had liabilities of US$129.4m falling due within a year, and liabilities of US$179.6m due beyond that. On the other hand, it had cash of US$51.4m and US$66.9m worth of receivables due within a year. So its liabilities total US$190.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$131.5m, we think shareholders really should watch iMedia Brands's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine iMedia Brands's ability to maintain a healthy balance sheet going forward. 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 iMedia Brands wasn't profitable at an EBIT level, but managed to grow its revenue by 6.4%, to US$482m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, iMedia Brands had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$5.8m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$60m over the last twelve months. So suffice it to say we consider the stock to be risky. 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. For example - iMedia Brands has 3 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.