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With a market capitalization of US$13b, Akamai Technologies, Inc. (NASDAQ:AKAM) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for AKAM, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
AKAM’s Debt (And Cash Flows)
AKAM's debt levels surged from US$669m to US$1.3b over the last 12 months , which includes long-term debt. With this rise in debt, AKAM's cash and short-term investments stands at US$1.1b , ready to be used for running the business. Additionally, AKAM has generated cash from operations of US$977m over the same time period, resulting in an operating cash to total debt ratio of 76%, signalling that AKAM’s current level of operating cash is high enough to cover debt.
Can AKAM pay its short-term liabilities?
Looking at AKAM’s US$570m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 3.19x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does AKAM face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 27%, AKAM's debt level may be seen as prudent. This range is considered safe as AKAM is not taking on too much debt obligation, which may be constraining for future growth. We can test if AKAM’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In AKAM's case, the ratio of 25.39x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like AKAM are considered a risk-averse investment.
AKAM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for AKAM's financial health. Other important fundamentals need to be considered alongside. You should continue to research Akamai Technologies to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AKAM’s future growth? Take a look at our free research report of analyst consensus for AKAM’s outlook.
- Valuation: What is AKAM 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 AKAM 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.
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 email@example.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.