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How Financially Strong Is Zebra Technologies Corporation (NASDAQ:ZBRA)?

Simply Wall St

The size of Zebra Technologies Corporation (NASDAQ:ZBRA), a US$10.0b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. This article will examine Zebra Technologies’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ZBRA here.

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ZBRA’s Debt (And Cash Flows)

Over the past year, ZBRA has reduced its debt from US$2.1b to US$1.9b , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$62m , ready to be used for running the business. Moreover, ZBRA has produced cash from operations of US$711m over the same time period, leading to an operating cash to total debt ratio of 38%, meaning that ZBRA’s operating cash is sufficient to cover its debt.

Can ZBRA pay its short-term liabilities?

At the current liabilities level of US$1.1b, the company may not be able to easily meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1x. The current ratio is the number you get when you divide current assets by current liabilities.

NasdaqGS:ZBRA Historical Debt, May 18th 2019

Does ZBRA face the risk of succumbing to its debt-load?

With total debt exceeding equities, Zebra Technologies is considered a highly levered company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if ZBRA’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For ZBRA, the ratio of 6.31x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ZBRA and other large-cap investments thought to be safe.

Next Steps:

Although ZBRA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure ZBRA has company-specific issues impacting its capital structure decisions. You should continue to research Zebra Technologies to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ZBRA’s future growth? Take a look at our free research report of analyst consensus for ZBRA’s outlook.
  2. Valuation: What is ZBRA 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 ZBRA is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.