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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Cognex Corporation (NASDAQ:CGNX), with a market cap of US$7.3b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine CGNX’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 CGNX here.
Does CGNX face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For CGNX, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with CGNX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does CGNX’s liquid assets cover its short-term commitments?
Since Cognex doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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. Looking at CGNX’s US$93m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.31x. The current ratio is calculated by dividing 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.
CGNX has no debt in addition to ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, but some level of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for CGNX's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Cognex to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CGNX’s future growth? Take a look at our free research report of analyst consensus for CGNX’s outlook.
- Valuation: What is CGNX 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 CGNX 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.