Is Lumentum Holdings Inc. (NASDAQ:LITE) A Financially Sound Company?
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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Lumentum Holdings Inc. (NASDAQ:LITE), with a market capitalization of US$4.0b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. LITE’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into LITE here.
Check out our latest analysis for Lumentum Holdings
LITE’s Debt (And Cash Flows)
LITE's debt levels surged from US$340m to US$838m over the last 12 months – this includes long-term debt. With this increase in debt, LITE currently has US$698m remaining in cash and short-term investments to keep the business going. Moreover, LITE has produced US$240m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29%, signalling that LITE’s operating cash is sufficient to cover its debt.
Does LITE’s liquid assets cover its short-term commitments?
With current liabilities at US$358m, it appears that the company has been able to meet these commitments with a current assets level of US$1.4b, leading to a 3.96x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does LITE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 56%, LITE can be considered as an above-average leveraged company. 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 LITE's case, the ratio of 8.31x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving LITE ample headroom to grow its debt facilities.
Next Steps:
Although LITE’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 LITE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how LITE has been performing in the past. You should continue to research Lumentum Holdings to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LITE’s future growth? Take a look at our free research report of analyst consensus for LITE’s outlook.
Valuation: What is LITE 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 LITE 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 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.
