Stocks with market capitalization between $2B and $10B, such as Nuance Communications Inc (NASDAQ:NUAN) with a size of US$4.8b, 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 NUAN’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 NUAN here.
Does NUAN produce enough cash relative to debt?
Over the past year, NUAN has reduced its debt from US$2.6b to US$2.3b , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$485m , ready to deploy into the business. Additionally, NUAN has generated US$292m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 13%, signalling that NUAN’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In NUAN’s case, it is able to generate 0.13x cash from its debt capital.
Can NUAN meet its short-term obligations with the cash in hand?
Looking at NUAN’s most recent US$731m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$986m, with a current ratio of 1.35x. Usually, for Software companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does NUAN face the risk of succumbing to its debt-load?
NUAN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since NUAN is presently loss-making, 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 cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for NUAN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Nuance Communications to get a better picture of the stock 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.
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 email@example.com.