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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Novanta Inc. (NASDAQ:NOVT) with a market-capitalization of US$3.0b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine NOVT’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 NOVT here.
NOVT’s Debt (And Cash Flows)
NOVT's debt level has been constant at around US$244m over the previous year which accounts for long term debt. At this stable level of debt, NOVT's cash and short-term investments stands at US$74m , ready to be used for running the business. Additionally, NOVT has produced US$75m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 31%, meaning that NOVT’s current level of operating cash is high enough to cover debt.
Can NOVT meet its short-term obligations with the cash in hand?
With current liabilities at US$101m, it seems that the business has been able to meet these obligations given the level of current assets of US$287m, with a current ratio of 2.83x. The current ratio is calculated by dividing current assets by current liabilities. For Electronic 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 NOVT face the risk of succumbing to its debt-load?
With debt reaching 55% of equity, NOVT may be thought of as relatively highly levered. 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 NOVT 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 NOVT's, case, the ratio of 8.23x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NOVT’s high interest coverage is seen as responsible and safe practice.
NOVT’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how NOVT has been performing in the past. I suggest you continue to research Novanta to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NOVT’s future growth? Take a look at our free research report of analyst consensus for NOVT’s outlook.
- Valuation: What is NOVT 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 NOVT 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 firstname.lastname@example.org. 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.