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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Infineon Technologies AG (ETR:IFX) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Infineon Technologies
What Is Infineon Technologies's Net Debt?
The image below, which you can click on for greater detail, shows that Infineon Technologies had debt of €1.54b at the end of June 2019, a reduction from €1.83b over a year. However, its balance sheet shows it holds €3.44b in cash, so it actually has €1.90b net cash.
How Healthy Is Infineon Technologies's Balance Sheet?
The latest balance sheet data shows that Infineon Technologies had liabilities of €2.10b due within a year, and liabilities of €2.59b falling due after that. Offsetting this, it had €3.44b in cash and €1.06b in receivables that were due within 12 months. So it has liabilities totalling €196.0m more than its cash and near-term receivables, combined.
This state of affairs indicates that Infineon Technologies'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 €20.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Infineon Technologies boasts net cash, so it's fair to say it does not have a heavy debt load!
It is just as well that Infineon Technologies's load is not too heavy, because its EBIT was down 26% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 Infineon Technologies'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.