Stocks with market capitalization between $2B and $10B, such as ON Semiconductor Corporation (NASDAQ:ON) with a size of US$9.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at ON’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ON here.
Check out our latest analysis for ON Semiconductor
ON’s Debt (And Cash Flows)
Over the past year, ON has reduced its debt from US$3.0b to US$2.8b – this includes long-term debt. With this reduction in debt, ON currently has US$1.1b remaining in cash and short-term investments to keep the business going. On top of this, ON has generated US$1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 46%, meaning that ON’s debt is appropriately covered by operating cash.
Does ON’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.5b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.16x. The current ratio is the number you get when you divide current assets by current liabilities. For Semiconductor companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ON’s debt level acceptable?
ON is a relatively highly levered company with a debt-to-equity of 87%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In ON's case, the ratio of 6.82x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although ON’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 ON has been performing in the past. I recommend you continue to research ON Semiconductor to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ON’s future growth? Take a look at our free research report of analyst consensus for ON’s outlook.
- Valuation: What is ON 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 ON 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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