Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Identiv, Inc. (NASDAQ:INVE) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Identiv's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Identiv had debt of US$23.8m, up from US$14.8m in one year. However, because it has a cash reserve of US$12.3m, its net debt is less, at about US$11.5m.
How Strong Is Identiv's Balance Sheet?
The latest balance sheet data shows that Identiv had liabilities of US$43.9m due within a year, and liabilities of US$3.80m falling due after that. Offsetting this, it had US$12.3m in cash and US$20.4m in receivables that were due within 12 months. So it has liabilities totalling US$15.0m more than its cash and near-term receivables, combined.
Since publicly traded Identiv shares are worth a total of US$142.4m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Identiv 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.
Over 12 months, Identiv made a loss at the EBIT level, and saw its revenue drop to US$81m, which is a fall of 5.8%. We would much prefer see growth.
Over the last twelve months Identiv produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.9m. 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. Another cause for caution is that is bled US$7.3m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very 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 2 warning signs for Identiv that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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