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Is II-VI Incorporated's (NASDAQ:IIVI) Balance Sheet A Threat To Its Future?

Simply Wall St

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While small-cap stocks, such as II-VI Incorporated (NASDAQ:IIVI) with its market cap of US$2.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into IIVI here.

IIVI’s Debt (And Cash Flows)

IIVI's debt levels surged from US$475m to US$533m over the last 12 months , which accounts for long term debt. With this increase in debt, IIVI's cash and short-term investments stands at US$221m , ready to be used for running the business. Additionally, IIVI has generated cash from operations of US$161m during the same period of time, leading to an operating cash to total debt ratio of 30%, signalling that IIVI’s debt is appropriately covered by operating cash.

Does IIVI’s liquid assets cover its short-term commitments?

At the current liabilities level of US$240m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.41x. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

NasdaqGS:IIVI Historical Debt, June 14th 2019

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

With a debt-to-equity ratio of 48%, IIVI can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether IIVI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IIVI's, case, the ratio of 7.46x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving IIVI ample headroom to grow its debt facilities.

Next Steps:

IIVI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how IIVI has been performing in the past. I recommend you continue to research II-VI to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for IIVI’s future growth? Take a look at our free research report of analyst consensus for IIVI’s outlook.
  2. Valuation: What is IIVI 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 IIVI 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.