We believe that International Money Express (NASDAQ: IMXI) is taking risks with its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor when you assess the risk of a business. Mostly, International Money Express, Inc. (NASDAQ: IMXI) is in debt. But the most important question is: what is the risk that this debt creates?
When is debt a problem?
Debt helps a business until it struggles to pay it off, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to issue shares at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
See our latest review for International Money Express
How much debt is International Money Express?
You can click on the graph below for historical numbers, but it shows that as of March 2021, International Money Express had $ 100.9 million in debt, an increase of $ 92.9 million over one year. On the other hand, it has US $ 55.1 million in cash, which leads to net debt of around US $ 45.8 million.
How healthy is International Money Express’s balance sheet?
The latest balance sheet data shows that International Money Express had liabilities of US $ 87.5 million due within one year, and liabilities of US $ 93.7 million due thereafter. In return for these obligations, he had cash of US $ 55.1 million as well as receivables valued at US $ 67.2 million due within 12 months. Its liabilities therefore exceed the sum of its cash and (short-term) receivables by US $ 59.0 million.
Given that the publicly traded shares of International Money Express are worth a total of US $ 547.2 million, it seems unlikely that this level of liabilities is a major threat. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
We use two main ratios to tell us about leverage versus earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
While International Money Express’s debt-to-EBITDA ratio (2.7) suggests it is using some debt, its interest coverage is very low at 1.1, suggesting high leverage. It looks like the company is incurring significant depreciation charges, so maybe its debt load is heavier than it first appears, since EBITDA is arguably a generous measure of profit. Shareholders should therefore probably be aware that interest charges seem to have really had an impact on the company lately. One of the factors behind the buyout of International Money Express is that it turned last year’s loss of EBIT into a gain of US $ 6.8 million in the past twelve months. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine International Money Express’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a company cannot pay its debt with profits on paper; he needs cash. It is therefore important to check to what extent its profit before interest and taxes (EBIT) is converted into actual free cash flow. Over the past year, International Money Express has experienced substantial negative free cash flow, in total. While investors no doubt expect this situation to reverse in due course, it clearly means that its use of debt is riskier.
Our point of view
At first glance, International Money Express’s interest hedging left us hesitant about the stock, and its conversion from EBIT to free cash flow was no more appealing than the empty restaurant on the busiest night of the day. ‘year. But on the bright side, his total liability level is a good sign and makes us more optimistic. Once we consider all of the above factors together, it seems to us that International Money Express debt makes it a bit risky. This isn’t necessarily a bad thing, but we would generally feel more comfortable with less leverage. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 3 warning signs with International Money Express (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without the burden of debt, feel free to check out our exclusive list of cash net growth stocks today.
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