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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Flex Ltd. (NASDAQ:FLEX), with a market cap of US$5.2b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. FLEX’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FLEX here.
Does FLEX Produce Much Cash Relative To Its Debt?
FLEX's debt level has been constant at around US$2.9b over the previous year which accounts for long term debt. At this current level of debt, FLEX currently has US$1.5b remaining in cash and short-term investments to keep the business going. Additionally, FLEX has generated US$1.5b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 52%, meaning that FLEX’s current level of operating cash is high enough to cover debt.
Can FLEX pay its short-term liabilities?
At the current liabilities level of US$7.5b, it seems that the business has been able to meet these commitments with a current assets level of US$9.5b, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is FLEX’s debt level acceptable?
FLEX is a relatively highly levered company with a debt-to-equity of 96%. 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 FLEX 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 FLEX's, case, the ratio of 4.65x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving FLEX ample headroom to grow its debt facilities.
FLEX’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. Since there is also no concerns around FLEX's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FLEX's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Flex to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FLEX’s future growth? Take a look at our free research report of analyst consensus for FLEX’s outlook.
- Valuation: What is FLEX 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 FLEX 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.