We Think Impala Platinum Holdings (JSE:IMP) Can Stay On Top Of Its 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.' 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. We can see that Impala Platinum Holdings Limited (JSE:IMP) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Impala Platinum Holdings's Net Debt?

As you can see below, at the end of December 2024, Impala Platinum Holdings had R2.93b of debt, up from R2.56b a year ago. Click the image for more detail. But on the other hand it also has R9.98b in cash, leading to a R7.05b net cash position.

A Look At Impala Platinum Holdings' Liabilities

According to the last reported balance sheet, Impala Platinum Holdings had liabilities of R16.5b due within 12 months, and liabilities of R19.7b due beyond 12 months. Offsetting this, it had R9.98b in cash and R10.6b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R15.6b.

Since publicly traded Impala Platinum Holdings shares are worth a total of R102.4b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Impala Platinum Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for Impala Platinum Holdings

The modesty of its debt load may become crucial for Impala Platinum Holdings if management cannot prevent a repeat of the 96% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Impala Platinum Holdings'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Impala Platinum Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Impala Platinum Holdings's free cash flow amounted to 32% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Impala Platinum Holdings does have more liabilities than liquid assets, it also has net cash of R7.05b. So we don't have any problem with Impala Platinum Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Impala Platinum Holdings has 2 warning signs we think you should be aware of.

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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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.