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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Elastic N.V. (NYSE:ESTC), with a market cap of US$5.5b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at ESTC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. 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. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. The good news for investors is that Elastic has no debt. It has been operating its business with zero debt and utilising only its equity capital. 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 meet its short-term obligations with the cash in hand?
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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$204m, the company has been able to meet these obligations given the level of current assets of US$430m, with a current ratio of 2.11x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
ESTC has zero-debt as well as ample cash to cover its near-term liabilities. Its safe operations reduces risk for the company and its investors, but some level of debt may also ramp up earnings growth and operational efficiency. I admit this is a fairly basic analysis for ESTC's financial health. Other important fundamentals need to be considered alongside. 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.