Is Immersion Corporation (NASDAQ:IMMR) A Financially Sound Company?
The direct benefit for Immersion Corporation (NASDAQ:IMMR), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is IMMR will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean IMMR has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
View our latest analysis for Immersion
Is IMMR growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. IMMR’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. IMMR delivered a strikingly high triple-digit revenue growth over the past year, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does IMMR’s liquid assets cover its short-term commitments?
Since Immersion doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$15.4m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 9.35x. Having said that, anything above 3x may be considered excessive by some investors. They might argue IMMR is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means IMMR has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around IMMR’s liquidity needs, this may be its optimal capital structure for the time being. In the future, IMMR’s financial situation may change. Keep in mind I haven’t considered other factors such as how IMMR has been performing in the past. I suggest you continue to research Immersion to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for IMMR’s future growth? Take a look at our free research report of analyst consensus for IMMR’s outlook.
Valuation: What is IMMR 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 IMMR is currently mispriced by the market.
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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
