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Is Cabot Microelectronics Corporation's (NASDAQ:CCMP) Balance Sheet Strong Enough To Weather A Storm?

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Mid-caps stocks, like Cabot Microelectronics Corporation (NASDAQ:CCMP) with a market capitalization of US$3.5b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine CCMP’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CCMP here.

See our latest analysis for Cabot Microelectronics

Does CCMP Produce Much Cash Relative To Its Debt?

CCMP's debt levels surged from US$141m to US$1.0b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$209m , ready to be used for running the business. Moreover, CCMP has generated cash from operations of US$152m during the same period of time, leading to an operating cash to total debt ratio of 15%, meaning that CCMP’s operating cash is less than its debt.

Does CCMP’s liquid assets cover its short-term commitments?

At the current liabilities level of US$165m, it seems that the business has been able to meet these obligations given the level of current assets of US$525m, with a current ratio of 3.18x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.

NasdaqGS:CCMP Historical Debt, April 5th 2019
NasdaqGS:CCMP Historical Debt, April 5th 2019

Is CCMP’s debt level acceptable?

CCMP is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CCMP is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CCMP's, case, the ratio of 45.39x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although CCMP’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. Keep in mind I haven't considered other factors such as how CCMP has been performing in the past. I recommend you continue to research Cabot Microelectronics to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CCMP’s future growth? Take a look at our free research report of analyst consensus for CCMP’s outlook.

  2. Valuation: What is CCMP 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 CCMP is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.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.

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