Stocks with market capitalization between $2B and $10B, such as Entegris, Inc. (NASDAQ:ENTG) with a size of US$5.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. Today we will look at ENTG’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 ENTG here.
ENTG’s Debt (And Cash Flows)
ENTG's debt levels surged from US$674m to US$939m over the last 12 months , which accounts for long term debt. With this increase in debt, ENTG currently has US$482m remaining in cash and short-term investments , ready to be used for running the business. Moreover, ENTG has generated cash from operations of US$313m over the same time period, leading to an operating cash to total debt ratio of 33%, meaning that ENTG’s operating cash is sufficient to cover its debt.
Can ENTG pay its short-term liabilities?
At the current liabilities level of US$270m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.82x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can ENTG service its debt comfortably?
ENTG is a relatively highly levered company with a debt-to-equity of 93%. 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 ENTG's case, the ratio of 10.19x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ENTG’s high interest coverage is seen as responsible and safe practice.
Although ENTG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ENTG'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 ENTG has been performing in the past. I suggest you continue to research Entegris to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ENTG’s future growth? Take a look at our free research report of analyst consensus for ENTG’s outlook.
- Valuation: What is ENTG 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 ENTG 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.
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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.