Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Pure Storage, Inc. (NYSE:PSTG), with a market cap of US$4.9b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at PSTG’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 PSTG here.
Does PSTG Produce Much Cash Relative To Its Debt?
PSTG has increased its debt level by about US$450m over the last 12 months including long-term debt. With this ramp up in debt, PSTG’s cash and short-term investments stands at US$1.2b to keep the business going. On top of this, PSTG has generated cash from operations of US$164m over the same time period, resulting in an operating cash to total debt ratio of 37%, meaning that PSTG’s current level of operating cash is high enough to cover debt.
Can PSTG meet its short-term obligations with the cash in hand?
Looking at PSTG’s US$510m 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 3.34x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio greater than 3x may be considered high by some.
Does PSTG face the risk of succumbing to its debt-load?
PSTG is a relatively highly levered company with a debt-to-equity of 61%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since PSTG is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although PSTG’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure PSTG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Pure Storage to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSTG’s future growth? Take a look at our free research report of analyst consensus for PSTG’s outlook.
- Valuation: What is PSTG 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 PSTG 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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