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.' 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 note that Ideanomics, Inc. (NASDAQ:IDEX) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Ideanomics
How Much Debt Does Ideanomics Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Ideanomics had debt of US$82.5m, up from US$11.4m in one year. However, it does have US$411.0m in cash offsetting this, leading to net cash of US$328.5m.
How Healthy Is Ideanomics' Balance Sheet?
The latest balance sheet data shows that Ideanomics had liabilities of US$126.0m due within a year, and liabilities of US$19.4m falling due after that. Offsetting this, it had US$411.0m in cash and US$4.33m in receivables that were due within 12 months. So it can boast US$269.9m more liquid assets than total liabilities.
This surplus strongly suggests that Ideanomics has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Ideanomics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ideanomics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Ideanomics reported revenue of US$88m, which is a gain of 964%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Ideanomics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ideanomics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$42m and booked a US$70m accounting loss. With only US$328.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Ideanomics's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Ideanomics (including 1 which can't be ignored) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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About OTCPK:IDEX.Q
Ideanomics
Through its subsidiaries, provides various mobility solutions in Asia, Europe, and the United States.
Moderate and slightly overvalued.