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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Nuance Communications, Inc. (NASDAQ:NUAN) with a market-capitalization of US$5.0b, rarely draw their attention. 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. Today we will look at NUAN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Nuance Communications’s financial health, so you should conduct further analysis into NUAN here.
NUAN’s Debt (And Cash Flows)
NUAN has shrunk its total debt levels in the last twelve months, from US$2.3b to US$1.9b , which includes long-term debt. With this reduction in debt, NUAN currently has US$621m remaining in cash and short-term investments to keep the business going. On top of this, NUAN has produced cash from operations of US$453m over the same time period, leading to an operating cash to total debt ratio of 24%, meaning that NUAN’s current level of operating cash is high enough to cover debt.
Can NUAN meet its short-term obligations with the cash in hand?
At the current liabilities level of US$608m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does NUAN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 93%, NUAN can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since NUAN is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
NUAN’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 NUAN’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 NUAN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Nuance Communications to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NUAN’s future growth? Take a look at our free research report of analyst consensus for NUAN’s outlook.
- Valuation: What is NUAN 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 NUAN 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.
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 email@example.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.