Is Silicon Motion Technology Corporation (NASDAQ:SIMO) A Financially Sound Company?
Investors are always looking for growth in small-cap stocks like Silicon Motion Technology Corporation (NASDAQ:SIMO), with a market cap of US$1.67B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Semiconductor industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into SIMO here.
Does SIMO generate an acceptable amount of cash through operations?
Over the past year, SIMO has maintained its debt levels at around US$25.00M made up of predominantly near term debt. At this constant level of debt, SIMO currently has US$366.39M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of SIMO’s operating efficiency ratios such as ROA here.
Can SIMO meet its short-term obligations with the cash in hand?
With current liabilities at US$177.24M, it appears that the company has been able to meet these commitments with a current assets level of US$568.80M, leading to a 3.21x current account ratio. Though, anything about 3x may be excessive, since SIMO may be leaving too much capital in low-earning investments.
Does SIMO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 5.06%, SIMO’s debt level is relatively low. SIMO is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
SIMO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how SIMO has been performing in the past. You should continue to research Silicon Motion Technology to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for SIMO’s future growth? Take a look at our free research report of analyst consensus for SIMO’s outlook.
2. Valuation: What is SIMO 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 SIMO 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.
