Health Check: How Prudently Does Infinera (NASDAQ:INFN) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Infinera Corporation (NASDAQ:INFN) 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, 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.

View our latest analysis for Infinera

What Is Infinera's Debt?

You can click the graphic below for the historical numbers, but it shows that as of July 2023 Infinera had US$683.0m of debt, an increase on US$640.6m, over one year. On the flip side, it has US$163.0m in cash leading to net debt of about US$520.0m.

How Healthy Is Infinera's Balance Sheet?

We can see from the most recent balance sheet that Infinera had liabilities of US$629.4m falling due within a year, and liabilities of US$789.5m due beyond that. Offsetting these obligations, it had cash of US$163.0m as well as receivables valued at US$325.6m due within 12 months. So its liabilities total US$930.3m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$664.9m, we think shareholders really should watch Infinera's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Infinera can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Infinera wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$1.6b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Infinera produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$3.1m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$28m in negative free cash flow over the last year. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Infinera you should know about.

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.