Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Innovex International, Inc. (NYSE:INVX) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Innovex International Carry?
You can click the graphic below for the historical numbers, but it shows that Innovex International had US$12.2m of debt in September 2024, down from US$61.3m, one year before. However, it does have US$113.4m in cash offsetting this, leading to net cash of US$101.2m.
How Strong Is Innovex International's Balance Sheet?
The latest balance sheet data shows that Innovex International had liabilities of US$174.8m due within a year, and liabilities of US$53.6m falling due after that. Offsetting these obligations, it had cash of US$113.4m as well as receivables valued at US$250.6m due within 12 months. So it can boast US$135.5m more liquid assets than total liabilities.
This surplus suggests that Innovex International has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Innovex International boasts net cash, so it's fair to say it does not have a heavy debt load!
The modesty of its debt load may become crucial for Innovex International if management cannot prevent a repeat of the 25% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Innovex International can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Innovex International may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Innovex International's free cash flow amounted to 42% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Innovex International has net cash of US$101.2m, as well as more liquid assets than liabilities. So we are not troubled with Innovex International's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Innovex International (1 is potentially serious) 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.
