Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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. As with many other companies Ideanomics, Inc. (NASDAQ:IDEX) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Ideanomics’s Net Debt?
As you can see below, at the end of March 2021, Ideanomics had US$81.3m of debt, up from US$20.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$371.0m in cash, so it actually has US$289.7m net cash.
How Healthy Is Ideanomics’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ideanomics had liabilities of US$120.8m due within 12 months and liabilities of US$19.6m due beyond that. Offsetting this, it had US$371.0m in cash and US$5.65m in receivables that were due within 12 months. So it actually has US$236.3m more liquid assets than total liabilities.
It’s good to see that Ideanomics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Ideanomics has more cash than debt is arguably a good indication that it can manage its debt safely. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ideanomics can strengthen its balance sheet over time.
Over 12 months, Ideanomics reported revenue of US$59m, which is a gain of 228%, although it did not report any earnings before interest and tax. That’s virtually the hole-in-one of revenue growth!
So How Risky Is Ideanomics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ideanomics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$35m of cash and made a loss of US$87m. With only US$289.7m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Ideanomics has dazzling revenue growth, so there’s a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt.