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Is Nuance Communications, Inc.'s (NASDAQ:NUAN) Balance Sheet A Threat To Its Future?

Simply Wall St

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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Nuance Communications, Inc. (NASDAQ:NUAN), with a market capitalization of US$4.7b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at NUAN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NUAN here.

Check out our latest analysis for Nuance Communications

Does NUAN Produce Much Cash Relative To Its Debt?

NUAN's debt levels have fallen from US$2.3b to US$1.9b over the last 12 months – this includes long-term debt. With this debt payback, NUAN currently has US$621m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NUAN has produced US$453m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24%, meaning that NUAN’s operating cash is sufficient to cover its debt.

Can NUAN meet its short-term obligations with the cash in hand?

Looking at NUAN’s US$608m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.79x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Software companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:NUAN Historical Debt, July 19th 2019

Is NUAN’s debt level acceptable?

With debt reaching 93% of equity, NUAN may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since NUAN is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

NUAN’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 NUAN has been performing in the past. I recommend you continue to research Nuance Communications to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NUAN’s future growth? Take a look at our free research report of analyst consensus for NUAN’s outlook.
  2. Valuation: What is NUAN 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 NUAN 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.

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 editorial-team@simplywallst.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.