Yahoo Finance Health Check: How Prudently Does Imperial Metals (TSE:III) Use Debt?
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.' 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 note that Imperial Metals Corporation (TSE:III) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
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 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Imperial Metals
What Is Imperial Metals's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Imperial Metals had CA$874.2m of debt, an increase on CA$829.7m, over one year. And it doesn't have much cash, so its net debt is about the same.
How Strong Is Imperial Metals's Balance Sheet?
According to the last reported balance sheet, Imperial Metals had liabilities of CA$914.3m due within 12 months, and liabilities of CA$262.1m due beyond 12 months. Offsetting these obligations, it had cash of CA$6.95m as well as receivables valued at CA$19.3m due within 12 months. So it has liabilities totalling CA$1.15b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the CA$325.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Imperial Metals would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Imperial Metals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Imperial Metals saw its revenue drop to CA$338m, which is a fall of 9.5%. That's not what we would hope to see.
Caveat Emptor
Importantly, Imperial Metals had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable CA$50m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through CA$17m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Imperial Metals insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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