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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Teradyne, Inc. (NASDAQ:TER), with a market cap of US$7.5b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. TER’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into TER here.
TER’s Debt (And Cash Flows)
Over the past year, TER has ramped up its debt from US$369m to US$439m , which accounts for long term debt. With this growth in debt, TER's cash and short-term investments stands at US$905m , ready to be used for running the business. Additionally, TER has produced cash from operations of US$577m in the last twelve months, resulting in an operating cash to total debt ratio of 131%, signalling that TER’s operating cash is sufficient to cover its debt.
Can TER meet its short-term obligations with the cash in hand?
Looking at TER’s US$442m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 3.61x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Does TER face the risk of succumbing to its debt-load?
TER’s level of debt is appropriate relative to its total equity, at 26%. This range is considered safe as TER is not taking on too much debt obligation, which may be constraining for future growth. We can test if TER’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TER, the ratio of 374x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
TER’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for TER's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Teradyne to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TER’s future growth? Take a look at our free research report of analyst consensus for TER’s outlook.
- Valuation: What is TER 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 TER 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 firstname.lastname@example.org. 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.