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Mid-caps stocks, like Coherent, Inc. (NASDAQ:COHR) with a market capitalization of US$3.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at COHR’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into COHR here.
COHR’s Debt (And Cash Flows)
COHR has sustained its debt level by about US$453m over the last 12 months including long-term debt. At this constant level of debt, COHR currently has US$349m remaining in cash and short-term investments , ready to be used for running the business. Additionally, COHR has generated US$230m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 51%, signalling that COHR’s debt is appropriately covered by operating cash.
Can COHR meet its short-term obligations with the cash in hand?
Looking at COHR’s US$365m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.2b, with a current ratio of 3.36x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Does COHR face the risk of succumbing to its debt-load?
With debt at 34% of equity, COHR may be thought of as appropriately levered. This range is considered safe as COHR is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether COHR is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In COHR's, case, the ratio of 14.86x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as COHR’s high interest coverage is seen as responsible and safe practice.
COHR’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how COHR has been performing in the past. I recommend you continue to research Coherent to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for COHR’s future growth? Take a look at our free research report of analyst consensus for COHR’s outlook.
- Valuation: What is COHR 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 COHR 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 firstname.lastname@example.org. 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.