Is MKS Instruments, Inc.’s (NASDAQ:MKSI) Balance Sheet A Threat To Its Future?

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Investors are always looking for growth in small-cap stocks like MKS Instruments, Inc. (NASDAQ:MKSI), with a market cap of US$4.0b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into MKSI here.

MKSI’s Debt (And Cash Flows)

MKSI has built up its total debt levels in the last twelve months, from US$347m to US$1.1b , which accounts for long term debt. With this rise in debt, MKSI’s cash and short-term investments stands at US$462m , ready to be used for running the business. On top of this, MKSI has generated US$370m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 35%, meaning that MKSI’s current level of operating cash is high enough to cover debt.

Can MKSI meet its short-term obligations with the cash in hand?

At the current liabilities level of US$297m, it appears that the company has been able to meet these commitments with a current assets level of US$1.4b, leading to a 4.59x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NasdaqGS:MKSI Historical Debt, May 30th 2019
NasdaqGS:MKSI Historical Debt, May 30th 2019

Does MKSI face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 55%, MKSI can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether MKSI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MKSI’s, case, the ratio of 30.49x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MKSI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although MKSI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 MKSI has been performing in the past. You should continue to research MKS Instruments to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for MKSI’s future growth? Take a look at our free research report of analyst consensus for MKSI’s outlook.
  2. Valuation: What is MKSI 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 MKSI is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.