When analysing debt levels, the balance sheet is the obvious place to start. So is Imdex's debt a risk? It doesn't seem so to us. And we liked the look of last year's 59% year-on-year EBIT growth. While we empathize with investors who find debt concerning, you should keep in mind that Imdex has net cash of AU$47.3m, as well as more liquid assets than liabilities.
This cold hard cash means it can reduce its debt when it wants to. During the last three years, Imdex produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. Imdex may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. So if you're focused on the future you can check out this free report showing analyst profit forecasts.įinally, a company can only pay off debt with cold hard cash, not accounting profits. But ultimately the future profitability of the business will decide if Imdex can strengthen its balance sheet over time. There's no doubt that we learn most about debt from the balance sheet. In addition to that, we're happy to report that Imdex has boosted its EBIT by 59%, thus reducing the spectre of future debt repayments. When we think about a company's use of debt, we first look at cash and debt together. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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.
Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. When Is Debt Dangerous?ĭebt 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. But the real question is whether this debt is making the company risky. We can see that Imdex Limited ( ASX:IMD) does use debt in its business. Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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.
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