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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Elastic N.V. (NYSE:ESTC), with a market cap of US$5.5b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at ESTC’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 ESTC here.
Is ESTC’s debt level acceptable?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Elastic, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with ESTC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can ESTC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Elastic has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at ESTC’s US$204m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. The current ratio is calculated by dividing current assets by current liabilities. For Software companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
ESTC has zero-debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, though, some degree of debt could also ramp up earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure ESTC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Elastic to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ESTC’s future growth? Take a look at our free research report of analyst consensus for ESTC’s outlook.
- Historical Performance: What has ESTC's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.