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Investors are always looking for growth in small-cap stocks like Brooks Automation, Inc. (NASDAQ:BRKS), with a market cap of US$2.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into BRKS here.
BRKS’s Debt (And Cash Flows)
Over the past year, BRKS has ramped up its debt from US$197m to US$547m – this includes long-term debt. With this rise in debt, BRKS currently has US$137m remaining in cash and short-term investments , ready to be used for running the business. On top of this, BRKS has produced cash from operations of US$73m in the last twelve months, resulting in an operating cash to total debt ratio of 13%, signalling that BRKS’s current level of operating cash is not high enough to cover debt.
Does BRKS’s liquid assets cover its short-term commitments?
Looking at BRKS’s US$178m in current liabilities, the company has been able to meet these commitments with a current assets level of US$509m, leading to a 2.86x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Semiconductor companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BRKS’s debt level acceptable?
With debt reaching 75% of equity, BRKS may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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. In BRKS's case, the ratio of 2.73x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as BRKS’s low interest coverage already puts the company at higher risk of default.
BRKS’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. 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 BRKS has company-specific issues impacting its capital structure decisions. I recommend you continue to research Brooks Automation to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BRKS’s future growth? Take a look at our free research report of analyst consensus for BRKS’s outlook.
- Valuation: What is BRKS 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 BRKS 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 email@example.com. 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.