These 4 Measures Indicate That InterDigital (NASDAQ:IDCC) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that InterDigital, Inc. (NASDAQ:IDCC) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 InterDigital

What Is InterDigital's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 InterDigital had US$607.9m of debt, an increase on US$424.1m, over one year. But on the other hand it also has US$950.7m in cash, leading to a US$342.8m net cash position.

How Strong Is InterDigital's Balance Sheet?

We can see from the most recent balance sheet that InterDigital had liabilities of US$254.4m falling due within a year, and liabilities of US$868.9m due beyond that. On the other hand, it had cash of US$950.7m and US$210.9m worth of receivables due within a year. So it can boast US$38.3m more liquid assets than 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$2.30b 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.

Even more impressive was the fact that InterDigital grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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. 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. Happily for any shareholders, InterDigital actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that InterDigital has net cash of US$342.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$235m, being 108% of its EBIT. So is InterDigital's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that InterDigital is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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. 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.