We Think InterDigital (NASDAQ:IDCC) Can Stay On Top Of Its Debt

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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View 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$607.4m in debt in March 2024; about the same as the year before. But it also has US$984.6m in cash to offset that, meaning it has US$377.2m net cash.

How Healthy Is InterDigital's Balance Sheet?

According to the last reported balance sheet, InterDigital had liabilities of US$903.8m due within 12 months, and liabilities of US$278.9m due beyond 12 months. Offsetting this, it had US$984.6m in cash and US$167.6m in receivables that were due within 12 months. So its liabilities total US$30.5m more than the combination of its cash and short-term receivables.

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 it's very unlikely that the US$3.11b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, InterDigital also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, InterDigital's EBIT dived 12%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. During the last three years, InterDigital generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

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$377.2m. And it impressed us with free cash flow of US$247m, being 99% 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. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with InterDigital , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com