InterDigital, Inc. (NASDAQ:IDCC) is a small-cap stock with a market capitalization of US$2.2b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I recommend you dig deeper yourself into IDCC here.
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IDCC’s Debt (And Cash Flows)
IDCC’s debt levels surged from US$289m to US$338m over the last 12 months , which accounts for long term debt. With this increase in debt, IDCC currently has US$793m remaining in cash and short-term investments , ready to be used for running the business. Additionally, IDCC has produced cash from operations of US$117m in the last twelve months, leading to an operating cash to total debt ratio of 35%, indicating that IDCC’s operating cash is sufficient to cover its debt.
Can IDCC pay its short-term liabilities?
With current liabilities at US$448m, the company has been able to meet these obligations given the level of current assets of US$876m, with a current ratio of 1.95x. The current ratio is the number you get when you divide current assets by current liabilities. For Communications companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can IDCC service its debt comfortably?
IDCC is a relatively highly levered company with a debt-to-equity of 41%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IDCC’s case, the ratio of 1.57x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although IDCC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around IDCC’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for IDCC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research InterDigital to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IDCC’s future growth? Take a look at our free research report of analyst consensus for IDCC’s outlook.
- Valuation: What is IDCC worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether IDCC is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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