Legendary fund manager Li Lu (who 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. 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. Importantly, ImExHS Limited (ASX:IME) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for ImExHS

What Is ImExHS's Net Debt?

You can click the graphic below for the historical numbers, but it shows that ImExHS had AU$407.9k of debt in June 2019, down from AU$893.4k, one year before. On the flip side, it has AU$220.0k in cash leading to net debt of about AU$187.8k.

How Strong Is ImExHS's Balance Sheet?

We can see from the most recent balance sheet that ImExHS had liabilities of AU$4.20m falling due within a year, and liabilities of AU$88.0k due beyond that. Offsetting these obligations, it had cash of AU$220.0k as well as receivables valued at AU$3.82m due within 12 months. So its liabilities total AU$246.8k more than the combination of its cash and short-term receivables.

Having regard to ImExHS's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$43.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. But either way, ImExHS has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since ImExHS will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, ImExHS reported revenue of AU$6.4m, which is a gain of 58%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.