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We Think Imaflex (CVE:IFX) Can Manage Its Debt With Ease

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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 Imaflex Inc. (CVE:IFX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Imaflex

What Is Imaflex's Debt?

As you can see below, Imaflex had CA$5.98m of debt at March 2022, down from CA$7.76m a year prior. But on the other hand it also has CA$7.42m in cash, leading to a CA$1.44m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Imaflex's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Imaflex had liabilities of CA$15.2m due within 12 months and liabilities of CA$6.16m due beyond that. Offsetting this, it had CA$7.42m in cash and CA$18.3m in receivables that were due within 12 months. So it can boast CA$4.44m more liquid assets than total liabilities.

This surplus suggests that Imaflex has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Imaflex has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Imaflex has increased its EBIT by 2.7% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Imaflex can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Imaflex 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. During the last three years, Imaflex produced sturdy free cash flow equating to 74% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Imaflex has CA$1.44m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 74% of that EBIT to free cash flow, bringing in CA$4.6m. So we don't think Imaflex's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Imaflex you should know about.

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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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.

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