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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Analog Devices, Inc. (NASDAQ:ADI) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, its financial health remains the key to continued success. Today we will look at Analog Devices’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ADI here.
Does ADI Produce Much Cash Relative To Its Debt?
ADI's debt levels have fallen from US$7.4b to US$6.3b over the last 12 months , which includes long-term debt. With this debt repayment, ADI currently has US$606m remaining in cash and short-term investments to keep the business going. Moreover, ADI has generated cash from operations of US$2.4b over the same time period, resulting in an operating cash to total debt ratio of 39%, signalling that ADI’s current level of operating cash is high enough to cover debt.
Can ADI pay its short-term liabilities?
At the current liabilities level of US$850m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.34x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Semiconductor companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ADI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 54%, ADI can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ADI, the ratio of 8.2x suggests that interest is well-covered. Large-cap investments like ADI are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although ADI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure ADI has company-specific issues impacting its capital structure decisions. You should 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.