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Stocks with market capitalization between $2B and $10B, such as Vonage Holdings Corp. (NYSE:VG) with a size of US$2.9b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at VG’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into VG here.
Does VG Produce Much Cash Relative To Its Debt?
VG's debt levels surged from US$233m to US$619m over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$18m , ready to be used for running the business. Additionally, VG has generated cash from operations of US$102m in the last twelve months, leading to an operating cash to total debt ratio of 17%, indicating that VG’s operating cash is less than its debt.
Can VG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$207m, the company may not have an easy time meeting these commitments with a current assets level of US$138m, leading to a current ratio of 0.66x. The current ratio is calculated by dividing current assets by current liabilities.
Does VG face the risk of succumbing to its debt-load?
VG is a highly-leveraged company with debt exceeding equity by over 100%. 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 VG's case, the ratio of 2.34x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although VG’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how VG has been performing in the past. I recommend you continue to research Vonage Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VG’s future growth? Take a look at our free research report of analyst consensus for VG’s outlook.
- Valuation: What is VG 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 VG 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.
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 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.