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.' 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. Importantly, iMedia Brands, Inc. (NASDAQ:IMBI) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is iMedia Brands's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of July 2021 iMedia Brands had US$73.9m of debt, an increase on US$54.7m, over one year. On the flip side, it has US$20.9m in cash leading to net debt of about US$53.0m.NasdaqGM:IMBI Debt to Equity History October 14th 2021
How Strong Is iMedia Brands' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that iMedia Brands had liabilities of US$121.5m due within 12 months and liabilities of US$138.1m due beyond that. On the other hand, it had cash of US$20.9m and US$64.3m worth of receivables due within a year. So its liabilities total US$174.3m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of US$124.2m, we think shareholders really should watch iMedia Brands's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if iMedia Brands 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.
Over 12 months, iMedia Brands saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Over the last twelve months iMedia Brands produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$7.3m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$59m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that iMedia Brands is showing 3 warning signs in our investment analysis , and 1 of those is concerning...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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