Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like StoneCo Ltd. (NASDAQ:STNE), with a market cap of US$9.9b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine STNE’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into STNE here.
Does STNE Produce Much Cash Relative To Its Debt?
STNE’s debt levels surged from R$2.1b to R$2.8b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at R$3.1b , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can assess some of STNE’s operating efficiency ratios such as ROA here.
Does STNE’s liquid assets cover its short-term commitments?
With current liabilities at R$6.1b, it seems that the business has been able to meet these obligations given the level of current assets of R$12b, with a current ratio of 2.05x. The current ratio is the number you get when you divide current assets by current liabilities. For IT 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.
Is STNE’s debt level acceptable?
STNE is a relatively highly levered company with a debt-to-equity of 56%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible.
STNE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure STNE has company-specific issues impacting its capital structure decisions. I recommend you continue to research StoneCo to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STNE’s future growth? Take a look at our free research report of analyst consensus for STNE’s outlook.
- Valuation: What is STNE 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 STNE 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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