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Warren Buffett famously said, ‘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. We can see that IntriCon Corporation (NASDAQ:IIN) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 think about a company’s use of debt, we first look at cash and debt together.
What Is IntriCon’s Debt?
The image below, which you can click on for greater detail, shows that IntriCon had debt of US$199.0k at the end of March 2019, a reduction from US$13.0m over a year. However, it does have US$29.2m in cash offsetting this, leading to net cash of US$29.0m.
How Strong Is IntriCon’s Balance Sheet?
The latest balance sheet data shows that IntriCon had liabilities of US$21.3m due within a year, and liabilities of US$6.53m falling due after that. On the other hand, it had cash of US$29.2m and US$16.8m worth of receivables due within a year. So it actually has US$18.2m more liquid assets than total liabilities.
This short term liquidity is a sign that IntriCon could probably pay off its debt with ease, as its balance sheet is far from stretched. IntriCon boasts net cash, so it’s fair to say it does not have a heavy debt load!
On top of that, IntriCon grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine IntriCon’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While IntriCon has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last two years, IntriCon burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that IntriCon has net cash of US$29m, as well as more liquid assets than liabilities. And we liked the look of last year’s 63% year-on-year EBIT growth. So we don’t think IntriCon’s use of debt is risky. Over time, share prices tend to follow earnings per share, so if you’re interested in IntriCon, you may well want to click here to check an interactive graph of its earnings per share history.
If you’re interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.