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.' 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.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Impinj had US$84.0m of debt, an increase on US$52.7m, over one year. However, its balance sheet shows it holds US$112.0m in cash, so it actually has US$27.9m net cash.NasdaqGS:PI Debt to Equity History August 28th 2021
How Strong Is Impinj's Balance Sheet?
According to the last reported balance sheet, Impinj had liabilities of US$107.7m due within 12 months, and liabilities of US$14.9m due beyond 12 months. Offsetting this, it had US$112.0m in cash and US$26.0m in receivables that were due within 12 months. So it can boast US$15.3m more liquid assets than total liabilities.
This state of affairs indicates that Impinj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.45b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Impinj has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Impinj can strengthen its balance sheet over time. 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is Impinj?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Impinj had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$24m and booked a US$48m accounting loss. Given it only has net cash of US$27.9m, 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Impinj is showing 3 warning signs in our investment analysis , you should know about...
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. 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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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