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Is Catalent, Inc.’s (NYSE:CTLT) Balance Sheet A Threat To Its Future?

Simply Wall St

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Catalent, Inc. (NYSE:CTLT), with a market capitalization of US$6.2b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. CTLT’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CTLT here.

View our latest analysis for Catalent

Does CTLT produce enough cash relative to debt?

Over the past year, CTLT has reduced its debt from US$2.7b to US$2.2b , which also accounts for long term debt. With this debt payback, CTLT’s cash and short-term investments stands at US$208m for investing into the business. Moreover, CTLT has produced US$283m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 13%, indicating that CTLT’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CTLT’s case, it is able to generate 0.13x cash from its debt capital.

Can CTLT meet its short-term obligations with the cash in hand?

At the current liabilities level of US$514m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.08x. For Pharmaceuticals 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.

NYSE:CTLT Historical Debt, March 7th 2019

Does CTLT face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, CTLT is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In CTLT’s case, the ratio of 2.71x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CTLT’s low interest coverage already puts the company at higher risk of default.

Next Steps:

CTLT’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. I admit this is a fairly basic analysis for CTLT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Catalent to get a more holistic view of the mid-cap by looking at:

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