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The size of Analog Devices, Inc. (NASDAQ:ADI), a US$39b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. I will provide an overview of Analog Devices’s financial liquidity and leverage to give you an idea of Analog Devices’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into ADI here.
Does ADI produce enough cash relative to debt?
Over the past year, ADI has reduced its debt from US$7.9b to US$6.3b – this includes long-term debt. With this reduction in debt, ADI currently has US$817m remaining in cash and short-term investments for investing into the business. On top of this, ADI has produced cash from operations of US$2.4b during the same period of time, resulting in an operating cash to total debt ratio of 39%, meaning that ADI’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ADI’s case, it is able to generate 0.39x cash from its debt capital.
Can ADI pay its short-term liabilities?
At the current liabilities level of US$1.4b, it appears that the company has been able to meet these obligations given the level of current assets of US$2.1b, with a current ratio of 1.5x. Usually, for Semiconductor companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can ADI service its debt comfortably?
With debt reaching 58% of equity, ADI may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times ADI’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In ADI’s case, the ratio of 7.96x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as ADI is a safe investment.
ADI’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. I admit this is a fairly basic analysis for ADI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Analog Devices to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADI’s future growth? Take a look at our free research report of analyst consensus for ADI’s outlook.
- Valuation: What is ADI 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 ADI 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. On rare occasion, data errors may occur. Thank you for reading.