Are Itron, Inc.’s (NASDAQ:ITRI) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like Itron, Inc. (NASDAQ:ITRI), with a market cap of US$1.9b. However, an important fact which most ignore is: how financially healthy is the business? Since ITRI is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into ITRI here.

Does ITRI Produce Much Cash Relative To Its Debt?

Over the past year, ITRI has ramped up its debt from US$614m to US$1.0b – this includes long-term debt. With this increase in debt, ITRI currently has US$123m remaining in cash and short-term investments to keep the business going. On top of this, ITRI has produced US$110m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 11%, indicating that ITRI’s operating cash is less than its debt.

Can ITRI pay its short-term liabilities?

At the current liabilities level of US$653m, it appears that the company has been able to meet these commitments with a current assets level of US$896m, leading to a 1.37x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electronic companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:ITRI Historical Debt, April 5th 2019
NasdaqGS:ITRI Historical Debt, April 5th 2019

Is ITRI’s debt level acceptable?

With total debt exceeding equity, ITRI is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since ITRI is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although ITRI’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 ITRI’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ITRI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Itron to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ITRI’s future growth? Take a look at our free research report of analyst consensus for ITRI’s outlook.
  2. Valuation: What is ITRI 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 ITRI is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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