Nuance Communications, Inc. (NASDAQ:NUAN): Time For A Financial Health Check
Stocks with market capitalization between $2B and $10B, such as Nuance Communications, Inc. (NASDAQ:NUAN) with a size of US$4.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. NUAN’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NUAN here.
See our latest analysis for Nuance Communications
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Does NUAN produce enough cash relative to debt?
NUAN has shrunken its total debt levels in the last twelve months, from US$2.6b to US$2.2b , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$452m , ready to deploy into the business. On top of this, NUAN has generated cash from operations of US$444m in the last twelve months, leading to an operating cash to total debt ratio of 20%, signalling that NUAN’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 NUAN’s case, it is able to generate 0.2x cash from its debt capital.
Does NUAN’s liquid assets cover its short-term commitments?
Looking at NUAN’s US$764m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$929m, with a current ratio of 1.22x. Usually, for Software companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does NUAN face the risk of succumbing to its debt-load?
NUAN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since NUAN is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
NUAN’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how NUAN has been performing in the past. I recommend you continue to research Nuance Communications to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for NUAN’s future growth? Take a look at our free research report of analyst consensus for NUAN’s outlook.
Valuation: What is NUAN 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 NUAN 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 editorial-team@simplywallst.com.
