What You Must Know About Xcerra Corporation’s (NASDAQ:XCRA) Financial Strength
While small-cap stocks, such as Xcerra Corporation (NASDAQ:XCRA) with its market cap of $549.92M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Semiconductor industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into XCRA here.
Does XCRA generate an acceptable amount of cash through operations?
XCRA’s debt levels have fallen from $24.0M to $21.3M over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at $160.7M , ready to deploy into the business. Additionally, XCRA has generated $27.2M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 127.68%, meaning that XCRA’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In XCRA’s case, it is able to generate 1.28x cash from its debt capital.
Does XCRA’s liquid assets cover its short-term commitments?
At the current liabilities level of $98.4M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $355.3M, with a current ratio of 3.61x. Though, a ratio greater than 3x may be considered as too high, as XCRA could be holding too much capital in a low-return investment environment.
Is XCRA’s debt level acceptable?
XCRA’s level of debt is low relative to its total equity, at 6.21%. XCRA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether XCRA 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 XCRA’s, case, the ratio of 229.08x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving XCRA ample headroom to grow its debt facilities.
Next Steps:
XCRA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure XCRA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Xcerra to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for XCRA’s future growth? Take a look at our free research report of analyst consensus for XCRA’s outlook.
2. Valuation: What is XCRA 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 XCRA 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 pass 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.
