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 note that Infinera Corporation (NASDAQ:INFN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Infinera Carry?
As you can see below, at the end of September 2020, Infinera had US$540.6m of debt, up from US$325.9m a year ago. Click the image for more detail. However, because it has a cash reserve of US$196.5m, its net debt is less, at about US$344.1m.
How Healthy Is Infinera's Balance Sheet?
The latest balance sheet data shows that Infinera had liabilities of US$500.3m due within a year, and liabilities of US$721.9m falling due after that. On the other hand, it had cash of US$196.5m and US$290.3m worth of receivables due within a year. So its liabilities total US$735.4m more than the combination of its cash and short-term receivables.
Infinera has a market capitalization of US$2.02b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 11%, to US$1.4b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Infinera produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$131m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$204m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 4 warning signs for Infinera you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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