Is InterDigital (NASDAQ:IDCC) 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, InterDigital, Inc. (NASDAQ:IDCC) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for InterDigital

What Is InterDigital's Net Debt?

The chart below, which you can click on for greater detail, shows that InterDigital had US$609.5m in debt in June 2023; about the same as the year before. However, it does have US$840.7m in cash offsetting this, leading to net cash of US$231.2m.

How Healthy Is InterDigital's Balance Sheet?

The latest balance sheet data shows that InterDigital had liabilities of US$446.5m due within a year, and liabilities of US$713.3m falling due after that. Offsetting this, it had US$840.7m in cash and US$316.6m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that InterDigital's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.20b 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 38% 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 ultimately the future profitability of the business will decide if InterDigital can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the most recent three years, InterDigital recorded free cash flow worth 80% 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 look at a company's total liabilities, it is very reassuring that InterDigital has US$231.2m in net cash. And we liked the look of last year's 38% year-on-year EBIT growth. So we don't think InterDigital's use of debt is risky. 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 1 warning sign we've spotted with InterDigital .

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.