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Mid-caps stocks, like Brooks Automation, Inc. (NASDAQ:BRKS) with a market capitalization of US$2.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. BRKS’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into BRKS here.
BRKS’s Debt (And Cash Flows)
BRKS's debt levels surged from US$197m to US$547m over the last 12 months , which includes long-term debt. With this rise in debt, BRKS currently has US$137m remaining in cash and short-term investments to keep the business going. Moreover, BRKS has produced US$73m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13%, signalling that BRKS’s operating cash is less than its debt.
Can BRKS meet its short-term obligations with the cash in hand?
Looking at BRKS’s US$178m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$509m, with a current ratio of 2.86x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Semiconductor companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BRKS face the risk of succumbing to its debt-load?
With debt reaching 75% of equity, BRKS may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if BRKS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For BRKS, the ratio of 2.73x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
BRKS’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 BRKS's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how BRKS has been performing in the past. I recommend you continue to research Brooks Automation to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BRKS’s future growth? Take a look at our free research report of analyst consensus for BRKS’s outlook.
- Valuation: What is BRKS 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 BRKS 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.