Is InterDigital (NASDAQ:IDCC) A Risky Investment?

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.' 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. As with many other companies InterDigital, Inc. (NASDAQ:IDCC) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for InterDigital

How Much Debt Does InterDigital Carry?

The chart below, which you can click on for greater detail, shows that InterDigital had US$611.3m in debt in September 2023; about the same as the year before. However, it does have US$1.08b in cash offsetting this, leading to net cash of US$472.7m.

How Healthy Is InterDigital's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that InterDigital had liabilities of US$445.4m due within 12 months and liabilities of US$793.3m due beyond that. On the other hand, it had cash of US$1.08b and US$145.5m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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$2.81b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, InterDigital boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, InterDigital grew its EBIT by 58% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While InterDigital 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. Happily for any shareholders, InterDigital actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about InterDigital's liabilities, but we can be reassured by the fact it has has net cash of US$472.7m. The cherry on top was that in converted 122% of that EBIT to free cash flow, bringing in US$551m. So we don't think InterDigital's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for InterDigital that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.