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.’ 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 note that IMAX Corporation (NYSE:IMAX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is IMAX’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that IMAX had US$232.8m of debt in September 2021, down from US$298.0m, one year before. However, it also had US$193.0m in cash, and so its net debt is US$39.7m.
A Look At IMAX’s Liabilities
Zooming in on the latest balance sheet data, we can see that IMAX had liabilities of US$72.9m due within 12 months and liabilities of US$377.8m due beyond that. Offsetting this, it had US$193.0m in cash and US$179.4m in receivables that were due within 12 months. So its liabilities total US$78.3m more than the combination of its cash and short-term receivables.
Since publicly traded IMAX shares are worth a total of US$1.08b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 IMAX can strengthen its balance sheet over time.
In the last year IMAX’s revenue was pretty flat, and it made a negative EBIT. While that’s not too bad, we’d prefer see growth.
Caveat Emptor
Over the last twelve months IMAX produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$44m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$25m of cash over the last year. So to be blunt we think it is risky.