Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Sogou Inc. (NYSE:SOGO), with a market cap of US$2.3b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. SOGO’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SOGO here.
Is SOGO’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. The good news for investors is that Sogou has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with SOGO, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does SOGO’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Sogou has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$456m, the company has been able to meet these commitments with a current assets level of US$1.2b, leading to a 2.68x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Interactive Media and Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
SOGO has zero-debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, however, some degree of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure SOGO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sogou to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SOGO’s future growth? Take a look at our free research report of analyst consensus for SOGO’s outlook.
- Valuation: What is SOGO 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 SOGO 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.
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