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Is KLA-Tencor Corporation's (NASDAQ:KLAC) Balance Sheet A Threat To Its Future?

Simply Wall St

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There are a number of reasons that attract investors towards large-cap companies such as KLA-Tencor Corporation (NASDAQ:KLAC), with a market cap of US$21b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Let’s take a look at KLA-Tencor’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into KLAC here.

See our latest analysis for KLA-Tencor

KLAC’s Debt (And Cash Flows)

KLAC has shrunk its total debt levels in the last twelve months, from US$2.5b to US$2.2b , which also accounts for long term debt. With this debt payback, KLAC's cash and short-term investments stands at US$2.7b , ready to be used for running the business. Additionally, KLAC has produced cash from operations of US$1.4b in the last twelve months, leading to an operating cash to total debt ratio of 62%, indicating that KLAC’s operating cash is sufficient to cover its debt.

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

At the current liabilities level of US$1.5b, the company has been able to meet these obligations given the level of current assets of US$4.5b, with a current ratio of 3.03x. 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:KLAC Historical Debt, May 3rd 2019

Can KLAC service its debt comfortably?

Since equity is smaller than total debt levels, KLA-Tencor is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times KLAC’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In KLAC's case, the ratio of 23.26x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like KLAC are considered a risk-averse investment.

Next Steps:

Although KLAC’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 KLAC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for KLAC's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research KLA-Tencor to get a more holistic view of the large-cap by looking at:

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