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What You Must Know About Cheetah Mobile Inc’s (NYSE:CMCM) Financial Strength

Cheetah Mobile Inc (NYSE:CMCM), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is CMCM will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CMCM has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.

Check out our latest analysis for Cheetah Mobile

Does CMCM’s growth rate justify its decision for financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on CMCM’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if CMCM is a high-growth company. CMCM’s revenue growth over the past year is a single-digit 0.7% which is relatively low for a small-cap company. More capital can help the business grow faster. If CMCM is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.

NYSE:CMCM Historical Debt September 19th 18
NYSE:CMCM Historical Debt September 19th 18

Can CMCM pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Cheetah Mobile has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of CN¥1.66b liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.06x. Though, anything above 3x is considered high and could mean that CMCM has too much idle capital in low-earning investments.

Next Steps:

CMCM is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around CMCM’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how CMCM has been performing in the past. You should continue to research Cheetah Mobile to get a more holistic view of the stock by looking at:

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

  2. Valuation: What is CMCM 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 CMCM 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.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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