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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Micro Focus International plc (LON:MCRO) with a market-capitalization of UK£6.9b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at MCRO’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MCRO here.
MCRO’s Debt (And Cash Flows)
MCRO's debt level has been constant at around US$4.9b over the previous year which accounts for long term debt. At this current level of debt, MCRO's cash and short-term investments stands at US$621m , ready to be used for running the business. Additionally, MCRO has generated US$615m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that MCRO’s current level of operating cash is not high enough to cover debt.
Can MCRO pay its short-term liabilities?
Looking at MCRO’s US$2.4b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$3.1b, leading to a 1.25x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does MCRO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 63%, MCRO 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. We can check to see whether MCRO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MCRO's, case, the ratio of 2.69x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although MCRO’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MCRO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Micro Focus International to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MCRO’s future growth? Take a look at our free research report of analyst consensus for MCRO’s outlook.
- Valuation: What is MCRO 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 MCRO 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.