Stocks with market capitalization between $2B and $10B, such as Teradata Corporation (NYSE:TDC) with a size of US$4.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at TDC’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 TDC here.
How much cash does TDC generate through its operations?
Over the past year, TDC has reduced its debt from US$553m to US$497m , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$882m for investing into the business. Additionally, TDC has generated US$305m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 61%, signalling that TDC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In TDC’s case, it is able to generate 0.61x cash from its debt capital.
Can TDC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$774m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.4b, with a current ratio of 1.79x. For IT companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TDC’s debt level acceptable?
With a debt-to-equity ratio of 87%, TDC can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since TDC is presently loss-making, 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 TDC’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. Since there is also no concerns around TDC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how TDC has been performing in the past. I recommend you continue to research Teradata to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TDC’s future growth? Take a look at our free research report of analyst consensus for TDC’s outlook.
- Valuation: What is TDC 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 TDC 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 firstname.lastname@example.org.