Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Ideanomics, Inc. (NASDAQ:IDEX) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Ideanomics
What Is Ideanomics’s Debt?
You can click the graphic below for the historical numbers, but it shows that Ideanomics had US$11.4m of debt in June 2020, down from US$19.0m, one year before. But on the other hand it also has US$36.4m in cash, leading to a US$25.0m net cash position.
A Look At Ideanomics’s Liabilities
Zooming in on the latest balance sheet data, we can see that Ideanomics had liabilities of US$29.3m due within 12 months and liabilities of US$26.8m due beyond that. Offsetting these obligations, it had cash of US$36.4m as well as receivables valued at US$4.50m due within 12 months. So its liabilities total US$15.2m more than the combination of its cash and short-term receivables.
Since publicly traded Ideanomics shares are worth a total of US$223.0m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Ideanomics 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 Ideanomics’s earnings that will influence how the balance sheet holds up in the future. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Ideanomics made a loss at the EBIT level, and saw its revenue drop to US$8.2m, which is a fall of 92%. That makes us nervous, to say the least.
So How Risky Is Ideanomics?
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 Ideanomics 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$19m and booked a US$162m accounting loss. With only US$25.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see positive free cash flow. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 3 warning signs for Ideanomics you should be aware of, and 2 of them shouldn’t be ignored.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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