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 should shareholders be worried about its use of debt?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Infinera's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Infinera had US$478.5m of debt in March 2021, down from US$541.2m, one year before. On the flip side, it has US$234.0m in cash leading to net debt of about US$244.5m.
A Look At Infinera's Liabilities
According to the last reported balance sheet, Infinera had liabilities of US$505.9m due within 12 months, and liabilities of US$667.7m due beyond 12 months. Offsetting this, it had US$234.0m in cash and US$276.9m in receivables that were due within 12 months. So its liabilities total US$662.7m more than the combination of its cash and short-term receivables.
Infinera has a market capitalization of US$2.05b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Infinera'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.
In the last year Infinera's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
Over the last twelve months Infinera produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$71m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$44m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Infinera that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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