Is Nutanix Inc (NASDAQ:NTNX) A Financially Sound Company?

Mid-caps stocks, like Nutanix Inc (NASDAQ:NTNX) with a market capitalization of US$8.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine NTNX’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. Don’t forget that this is a general and concentrated examination of Nutanix’s financial health, so you should conduct further analysis into NTNX here.

View our latest analysis for Nutanix

How does NTNX’s operating cash flow stack up against its debt?

NTNX has increased its debt level by about US$437m over the last 12 months accounting for long term debt. With this growth in debt, NTNX's cash and short-term investments stands at US$965m , ready to deploy into the business. Moreover, NTNX has generated cash from operations of US$132m over the same time period, leading to an operating cash to total debt ratio of 30%, signalling that NTNX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In NTNX’s case, it is able to generate 0.3x cash from its debt capital.

Does NTNX’s liquid assets cover its short-term commitments?

With current liabilities at US$471m, it appears that the company has been able to meet these commitments with a current assets level of US$1.3b, leading to a 2.71x current account ratio. For Software companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Can NTNX service its debt comfortably?

NTNX is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since NTNX is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although NTNX’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. Since there is also no concerns around NTNX'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 NTNX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Nutanix to get a more holistic view of the mid-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NTNX’s future growth? Take a look at our free research report of analyst consensus for NTNX’s outlook.
2. Valuation: What is NTNX 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 NTNX 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.