Stocks with market capitalization between $2B and $10B, such as Nordson Corporation (NASDAQ:NDSN) with a size of US$7.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at NDSN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into NDSN here.
How does NDSN’s operating cash flow stack up against its debt?
NDSN has shrunken its total debt levels in the last twelve months, from US$1.7b to US$1.6b – this includes long-term debt. With this debt repayment, NDSN’s cash and short-term investments stands at US$267m for investing into the business. On top of this, NDSN has produced US$471m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, meaning that NDSN’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NDSN’s case, it is able to generate 0.3x cash from its debt capital.
Can NDSN pay its short-term liabilities?
Looking at NDSN’s US$341m 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 3.16x. 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.
Is NDSN’s debt level acceptable?
With total debt exceeding equities, NDSN is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In NDSN’s case, the ratio of 10.97x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
NDSN’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 NDSN’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for NDSN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Nordson to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NDSN’s future growth? Take a look at our free research report of analyst consensus for NDSN’s outlook.
- Valuation: What is NDSN 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 NDSN 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.
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 email@example.com.