Red Hat Inc (NYSE:RHT), a large-cap worth US$23.73b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. Today we will look at Red Hat’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RHT here.
Does RHT produce enough cash relative to debt?
RHT has shrunken its total debt levels in the last twelve months, from US$756.7m to US$516.5m , which is made up of current and long term debt. With this debt payback, RHT currently has US$1.77b remaining in cash and short-term investments , ready to deploy into the business. On top of this, RHT has generated US$1.00b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 194%, signalling that RHT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RHT’s case, it is able to generate 1.94x cash from its debt capital.
Can RHT meet its short-term obligations with the cash in hand?
Looking at RHT’s most recent US$2.09b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Software companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does RHT face the risk of succumbing to its debt-load?
RHT is a relatively highly levered company with a debt-to-equity of 40.0%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies.
Although RHT’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 RHT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RHT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Red Hat to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RHT’s future growth? Take a look at our free research report of analyst consensus for RHT’s outlook.
- Valuation: What is RHT 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 RHT 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.