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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Infinera Corporation (NASDAQ:INFN) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Infinera Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Infinera had debt of US$288.0m, up from none in one year. However, it does have US$110.5m in cash offsetting this, leading to net debt of about US$177.5m.
How Strong Is Infinera's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Infinera had liabilities of US$532.4m due within 12 months and liabilities of US$466.5m due beyond that. Offsetting this, it had US$110.5m in cash and US$260.4m in receivables that were due within 12 months. So its liabilities total US$628.1m more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of US$936.5m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Infinera reported revenue of US$1.1b, which is a gain of 40%. Shareholders probably have their fingers crossed that it can grow its way to profits.
While we can certainly savour Infinera's tasty revenue growth, its negative earnings before interest and tax (EBIT) leaves a bitter aftertaste. Its EBIT loss was a whopping US$254m. 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. However, it doesn't help that it burned through US$244m of cash over the last year. So suffice it to say we consider the stock very risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Infinera insider transactions.
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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