InterDigital (NASDAQ:IDCC) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, InterDigital, Inc. (NASDAQ:IDCC) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for InterDigital

What Is InterDigital's Net Debt?

As you can see below, InterDigital had US$472.6m of debt at September 2024, down from US$611.3m a year prior. But it also has US$853.9m in cash to offset that, meaning it has US$381.3m net cash.

How Strong Is InterDigital's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InterDigital had liabilities of US$711.8m due within 12 months and liabilities of US$291.0m due beyond that. Offsetting this, it had US$853.9m in cash and US$237.7m in receivables that were due within 12 months. So it can boast US$88.7m more liquid assets than total liabilities.

Having regard to InterDigital's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.64b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that InterDigital has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that InterDigital has been able to increase its EBIT by 23% in twelve months, making it easier to pay down 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 InterDigital'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. InterDigital may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, InterDigital recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case InterDigital has US$381.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$7.0m, being 75% of its EBIT. So we don't think InterDigital's use of debt is risky. 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. For instance, we've identified 2 warning signs for InterDigital that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.