Is Cabot Microelectronics Corporation (CCMP) As Strong As Its Balance Sheet Indicates?
Mid-caps stocks, like Cabot Microelectronics Corporation (NASDAQ:CCMP) with a market capitalization of USD $2.47B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for Cabot Microelectronics
Can CCMP service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of CCMP, the debt-to-equity ratio is 24.19%, which means its risk of facing a debt-overhang is very low. We can test if CCMP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. CCMP’s interest on debt is sufficiently covered by earnings as it sits at around 51.42x. Debtors may be willing to loan the company more money, giving CCMP ample headroom to grow its debt facilities.
Can CCMP pay its short-term liabilities?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess CCMP’s cash and other liquid assets against its upcoming expenses. Our analysis shows that CCMP is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? CCMP’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Since CCMP’s financial situation could change over time, You should continue researching market expectations for CCMP’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. CCMP’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
