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InterDigital (NASDAQ:IDCC) Seems To Use Debt Rather Sparingly

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Simply Wall St
·4 min read
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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. We note that InterDigital, Inc. (NASDAQ:IDCC) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for InterDigital

How Much Debt Does InterDigital Carry?

The image below, which you can click on for greater detail, shows that InterDigital had debt of US$335.9m at the end of September 2020, a reduction from US$439.5m over a year. But it also has US$919.4m in cash to offset that, meaning it has US$583.4m net cash.


How Healthy Is InterDigital's Balance Sheet?

The latest balance sheet data shows that InterDigital had liabilities of US$317.4m due within a year, and liabilities of US$520.4m falling due after that. Offsetting this, it had US$919.4m in cash and US$28.3m in receivables that were due within 12 months. So it can boast US$109.8m more liquid assets than total liabilities.

This short term liquidity is a sign that InterDigital could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, InterDigital boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, InterDigital's EBIT launched higher than Elon Musk, gaining a whopping 365% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine InterDigital'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. InterDigital may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, InterDigital actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case InterDigital has US$583.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$119m, being 161% of its EBIT. So we don't think InterDigital's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for InterDigital you should be aware of.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.