Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Versum Materials Inc (NYSE:VSM) with a market-capitalization of US$4.25b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at VSM’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 VSM here. See our latest analysis for Versum Materials
How does VSM’s operating cash flow stack up against its debt?
Over the past year, VSM has maintained its debt levels at around US$984.30m comprising of short- and long-term debt. At this constant level of debt, VSM currently has US$271.40m remaining in cash and short-term investments for investing into the business. Additionally, VSM has generated cash from operations of US$262.50m during the same period of time, leading to an operating cash to total debt ratio of 26.67%, signalling that VSM’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VSM’s case, it is able to generate 0.27x cash from its debt capital.
Does VSM’s liquid assets cover its short-term commitments?
With current liabilities at US$158.00m, the company has been able to meet these obligations given the level of current assets of US$606.90m, with a current ratio of 3.84x. However, a ratio greater than 3x may be considered as too high, as VSM could be holding too much capital in a low-return investment environment.
Is VSM’s debt level acceptable?
With total debt exceeding equities, VSM is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether VSM 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 VSM’s, case, the ratio of 7.17x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VSM’s high interest coverage is seen as responsible and safe practice.
Although VSM’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 VSM has been performing in the past. I recommend you continue to research Versum Materials to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VSM’s future growth? Take a look at our free research report of analyst consensus for VSM’s outlook.
- Valuation: What is VSM 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 VSM 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.