Stocks with market capitalization between $2B and $10B, such as Semtech Corporation (NASDAQ:SMTC) with a size of USD $2.57B, 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 the two other categories of stocks. I recommend you look at the following hurdles to assess SMTC’s financial health. Check out our latest analysis for Semtech
Does SMTC face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of SMTC, the debt-to-equity ratio is 36.53%, which means its risk of facing a debt-overhang is very low. We can test if SMTC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings (EBIT) should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. SMTC’s profits amply covers interest at 7.76 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving SMTC ample headroom to grow its debt facilities.
Can SMTC pay its short-term liabilities?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare SMTC’s cash and other liquid assets against its upcoming debt. Our analysis shows that SMTC is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? SMTC’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Since SMTC’s financial situation could change over time, I encourage examining market expectations for SMTC’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. SMTC’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.