Stocks with market capitalization between $2B and $10B, such as Computershare Limited (ASX:CPU) with a size of AU$9.5b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at CPU’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 CPU here.
CPU’s Debt (And Cash Flows)
CPU's debt levels surged from US$1.6b to US$2.0b over the last 12 months , which includes long-term debt. With this growth in debt, CPU's cash and short-term investments stands at US$540m to keep the business going. On top of this, CPU has generated US$378m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 19%, indicating that CPU’s debt is not covered by operating cash.
Can CPU pay its short-term liabilities?
Looking at CPU’s US$741m in current 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 1.9x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CPU’s debt level acceptable?
Since total debt growth have outpaced equity growth, CPU is a highly 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 test if CPU’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CPU, the ratio of 7.46x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CPU’s high interest coverage is seen as responsible and safe practice.
CPU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CPU's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CPU's financial health. Other important fundamentals need to be considered alongside. You should continue to research Computershare to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPU’s future growth? Take a look at our free research report of analyst consensus for CPU’s outlook.
- Valuation: What is CPU 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 CPU 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.
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