Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Xperi Inc. (NYSE:XPER) does use debt in its business. But should shareholders be worried about its use of debt?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
View our latest analysis for Xperi
What Is Xperi's Debt?
The chart below, which you can click on for greater detail, shows that Xperi had US$50.0m in debt in September 2023; about the same as the year before. But it also has US$131.5m in cash to offset that, meaning it has US$81.5m net cash.
A Look At Xperi's Liabilities
We can see from the most recent balance sheet that Xperi had liabilities of US$151.5m falling due within a year, and liabilities of US$126.3m due beyond that. On the other hand, it had cash of US$131.5m and US$125.3m worth of receivables due within a year. So it has liabilities totalling US$20.9m more than its cash and near-term receivables, combined.
Of course, Xperi has a market capitalization of US$438.1m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Xperi also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Xperi'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.
Over 12 months, Xperi reported revenue of US$520m, which is a gain of 5.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Xperi?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Xperi had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$51m of cash and made a loss of US$409m. However, it has net cash of US$81.5m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Xperi 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.
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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.