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.' 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. Importantly, Impinj, Inc. (NASDAQ:PI) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Impinj Carry?
The image below, which you can click on for greater detail, shows that at September 2020 Impinj had debt of US$53.6m, up from US$23.4m in one year. But it also has US$105.1m in cash to offset that, meaning it has US$51.5m net cash.
A Look At Impinj's Liabilities
According to the last reported balance sheet, Impinj had liabilities of US$19.6m due within 12 months, and liabilities of US$71.1m due beyond 12 months. On the other hand, it had cash of US$105.1m and US$17.7m worth of receivables due within a year. So it can boast US$32.2m more liquid assets than total liabilities.
This surplus suggests that Impinj has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Impinj has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Impinj'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.
Over 12 months, Impinj made a loss at the EBIT level, and saw its revenue drop to US$143m, which is a fall of 2.3%. We would much prefer see growth.
So How Risky Is Impinj?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Impinj had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$13m of cash and made a loss of US$44m. Given it only has net cash of US$51.5m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 4 warning signs for Impinj you should be aware of.
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.
This article by Simply Wall St is general in nature. 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.
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