Stocks with market capitalization between $2B and $10B, such as Colfax Corporation (NYSE:CFX) with a size of US$3.6b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at CFX’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CFX here.
CFX’s Debt (And Cash Flows)
CFX's debt levels surged from US$1.1b to US$1.2b over the last 12 months , which accounts for long term debt. With this rise in debt, CFX currently has US$245m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CFX has generated US$226m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19%, meaning that CFX’s debt is not covered by operating cash.
Can CFX pay its short-term liabilities?
With current liabilities at US$1.2b, it seems that the business has been able to meet these obligations given the level of current assets of US$2.0b, with a current ratio of 1.63x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CFX service its debt comfortably?
With debt at 34% of equity, CFX may be thought of as appropriately levered. This range is considered safe as CFX is not taking on too much debt obligation, which may be constraining for future growth. We can test if CFX’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CFX, the ratio of 7.17x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CFX’s high interest coverage is seen as responsible and safe practice.
CFX’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for CFX's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Colfax to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CFX’s future growth? Take a look at our free research report of analyst consensus for CFX’s outlook.
- Valuation: What is CFX 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 CFX 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.
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