Is MACOM Technology Solutions Holdings Inc’s (NASDAQ:MTSI) Balance Sheet A Threat To Its Future?
Mid-caps stocks, like MACOM Technology Solutions Holdings Inc (NASDAQ:MTSI) with a market capitalization of $2.03B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. Check out our latest analysis for MACOM Technology Solutions Holdings
Does MTSI face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For MTSI, the debt-to-equity ratio is 88.30%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. 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 (EBIT) at least three times its interest payments is considered financially sound. MTSI’s profits only covers interest 1.68 times, which is deemed as inadequate. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Can MTSI pay its short-term liabilities?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. In order to measure liquidity, we must compare MTSI’s current assets with its upcoming liabilities. Our analysis shows that MTSI is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, investors should ask themselves if they believe MTSI can sustainably improve cash flows to better cushion for events which may require debt repayment. Since MTSI’s financial position could change over time, I suggest examining market expectations for MTSI’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. MTSI’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.
