The size of Broadcom Inc. (NASDAQ:AVGO), a US$109b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to extending previous success is in the health of the company’s financials. This article will examine Broadcom’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AVGO here.
How much cash does AVGO generate through its operations?
AVGO has sustained its debt level by about US$17b over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$4.3b for investing into the business. Moreover, AVGO has produced US$8.9b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 51%, indicating that AVGO’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AVGO’s case, it is able to generate 0.51x cash from its debt capital.
Can AVGO meet its short-term obligations with the cash in hand?
With current liabilities at US$2.3b, it appears that the company has been able to meet these commitments with a current assets level of US$9.1b, leading to a 3.9x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does AVGO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 66%, AVGO can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In AVGO’s case, the ratio of 10.68x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes AVGO and other large-cap investments thought to be safe.
AVGO’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. Since there is also no concerns around AVGO’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure AVGO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Broadcom to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AVGO’s future growth? Take a look at our free research report of analyst consensus for AVGO’s outlook.
- Valuation: What is AVGO 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 AVGO 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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