Palo Alto Networks, Inc. (NYSE:PANW), a large-cap worth US$23b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. Let’s take a look at Palo Alto Networks’s leverage and assess its financial strength 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 high-level overview, so I encourage you to look further into PANW here.
PANW’s Debt (And Cash Flows)
PANW’s debt levels surged from US$537m to US$1.6b over the last 12 months , which accounts for long term debt. With this increase in debt, PANW’s cash and short-term investments stands at US$2.8b to keep the business going. Additionally, PANW has produced cash from operations of US$1.0b in the last twelve months, resulting in an operating cash to total debt ratio of 67%, indicating that PANW’s current level of operating cash is high enough to cover debt.
Does PANW’s liquid assets cover its short-term commitments?
With current liabilities at US$1.9b, the company has been able to meet these commitments with a current assets level of US$3.5b, leading to a 1.87x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can PANW service its debt comfortably?
Palo Alto Networks is a highly levered company given that total debt exceeds equity. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. However, since PANW is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although PANW’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 PANW’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PANW’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Palo Alto Networks to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PANW’s future growth? Take a look at our free research report of analyst consensus for PANW’s outlook.
- Valuation: What is PANW 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 PANW 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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