The size of Analog Devices Inc (NASDAQ:ADI), a US$32.6b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. This article will examine Analog Devices’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ADI here.
Does ADI produce enough cash relative to debt?
ADI’s debt levels have fallen from US$8.2b to US$6.6b over the last 12 months , which is made up of current and long term debt. With this debt payback, ADI currently has US$773m remaining in cash and short-term investments , ready to deploy into the business. Moreover, ADI has generated US$2.3b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 36%, signalling that ADI’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ADI’s case, it is able to generate 0.36x cash from its debt capital.
Does ADI’s liquid assets cover its short-term commitments?
Looking at ADI’s most recent US$1.3b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. For Semiconductor companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ADI’s debt level acceptable?
With debt reaching 60% of equity, ADI may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether ADI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ADI’s case, the ratio of 7.98x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ADI are considered a risk-averse investment.
ADI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ADI’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ADI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Analog Devices to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADI’s future growth? Take a look at our free research report of analyst consensus for ADI’s outlook.
- Valuation: What is ADI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ADI is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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