Is IRIDEX (NASDAQ:IRIX) Using Too Much Debt?

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.' 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 can see that IRIDEX Corporation (NASDAQ:IRIX) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for IRIDEX

What Is IRIDEX's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 IRIDEX had debt of US$2.50m, up from none in one year. However, its balance sheet shows it holds US$11.9m in cash, so it actually has US$9.44m net cash.

How Healthy Is IRIDEX's Balance Sheet?

The latest balance sheet data shows that IRIDEX had liabilities of US$9.21m due within a year, and liabilities of US$1.99m falling due after that. On the other hand, it had cash of US$11.9m and US$6.08m worth of receivables due within a year. So it can boast US$6.81m more liquid assets than total liabilities.

This surplus suggests that IRIDEX has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that IRIDEX has more cash than debt is arguably a good indication that it can manage its debt safely. 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 IRIDEX can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year IRIDEX had a loss before interest and tax, and actually shrunk its revenue by 17%, to US$36m. We would much prefer see growth.

So How Risky Is IRIDEX?

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 IRIDEX lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$3.3m of cash and made a loss of US$7.7m. However, it has net cash of US$9.44m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with IRIDEX .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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. 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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