Is Ideanomics (NASDAQ:IDEX) Using Too Much Debt?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Ideanomics, Inc. (NASDAQ:IDEX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Ideanomics
How Much Debt Does Ideanomics Carry?
As you can see below, at the end of March 2021, Ideanomics had US$81.3m of debt, up from US$20.9m a year ago. Click the image for more detail. But it also has US$371.0m in cash to offset that, meaning it has US$289.7m net cash.
A Look At Ideanomics' Liabilities
According to the last reported balance sheet, Ideanomics had liabilities of US$120.8m due within 12 months, and liabilities of US$19.6m due beyond 12 months. Offsetting these obligations, it had cash of US$371.0m as well as receivables valued at US$5.65m due within 12 months. So it can boast US$236.3m more liquid assets than total liabilities.
This excess liquidity suggests that Ideanomics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ideanomics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Ideanomics'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.
In the last year Ideanomics wasn't profitable at an EBIT level, but managed to grow its revenue by 228%, to US$59m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Ideanomics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ideanomics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$35m and booked a US$87m accounting loss. With only US$289.7m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Ideanomics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Ideanomics (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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