Does Implenia (VTX:IMPN) Have A Healthy Balance Sheet?
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Implenia AG (VTX:IMPN) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Implenia
How Much Debt Does Implenia Carry?
The chart below, which you can click on for greater detail, shows that Implenia had CHF505.0m in debt in June 2019; about the same as the year before. But on the other hand it also has CHF704.7m in cash, leading to a CHF199.7m net cash position.
How Healthy Is Implenia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Implenia had liabilities of CHF1.67b due within 12 months and liabilities of CHF717.0m due beyond that. Offsetting these obligations, it had cash of CHF704.7m as well as receivables valued at CHF1.13b due within 12 months. So its liabilities total CHF544.3m more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CHF713.6m, so it does suggest shareholders should keep an eye on Implenia's use of debt. This suggests shareholders would heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Implenia boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that Implenia's EBIT was down 98% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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 Implenia 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Implenia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Implenia's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While Implenia does have more liabilities than liquid assets, it also has net cash of CHF199.7m. Despite the cash, we do find Implenia's EBIT growth rate concerning, so we're not particularly comfortable with the stock. While Implenia didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away.Click here to see if its earnings are heading in the right direction, over the medium term.
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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
