Is IMLtd (KOSDAQ:101390) Using Too Much Debt?

Legendary fund manager Li Lu (whom Charlie Munger backed) once said: “The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” When we think about how risky a company is, we look We always recommend the use of debt, because over-indebtedness can lead to ruin. We can see that IM Co., Ltd (KOSDAQ:101390) uses debt in its business. But should shareholders be concerned about the use of debt?

Why does debt pose risks?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario involves having to raise new equity capital at a low price, resulting in permanent shareholder dilution. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for IMLtd

How much is IMLtd’s debt?

As you can see below, IMLtd had ₩18.3b of debt at the end of September 2024, up from ₩11.3b a year ago. Click on the image for more details. On the other hand, the company has cash of ₩7.68b leading to net debt of about ₩10.6b.

How healthy is IMLtd’s balance sheet?

The most recent balance sheet shows that IMLtd had liabilities of ₩43.6b in a year, and liabilities of ₩4.19b beyond that. On the other hand, it had cash of ₩7.68b and ₩11.5b worth of receivables due within a year. So its liabilities exceed the sum of its cash and (near-term) receivables by ₩28.7b.

Given that this deficit is actually higher than the company’s market capitalization of ₩25.7b, we think shareholders should really watch IMLtd’s debt, like a parent watches their child rides a bike for the first time. Hypothetically, extremely large dilution would be required if the company were forced to pay off its debt by raising capital at the current share price. When analyzing debt levels, the balance sheet is the obvious place to start. However, the company’s future profitability will ultimately determine whether IMLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Last year, IMLtd was not profitable at the EBIT level, but managed to grow its revenue by 12% to ₩132b. This growth rate is a bit slow for our taste, but it takes all species to create a world.

Precautionary measure

In the last twelve months, IMLtd recorded a loss before interest and taxes (EBIT). In fact, at the EBIT level, the company lost a significant ₩5.3b. When we consider that together with the significant liabilities, we’re not particularly confident about the company. We’d like to see some strong near-term improvements before we get too interested in the stock. Not least because the company burned through negative free cash flow of ₩12b last year. That means it’s on the risky side of things. The balance sheet is clearly the area you should focus on when analyzing debt. However, not all investment risks lie on the balance sheet – quite the opposite. Note that IMLtd is displayed 4 warning signs in our investment analysis and we don’t like one of them so much…

Ultimately, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with no net debt 100% freeat the moment.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.