What does Science Applications International Corporation's (NYSE:SAIC) Balance Sheet Tell Us Abouts Its Future?

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Science Applications International Corporation (NYSE:SAIC) with a market-capitalization of $3.31B, rarely draw their attention and few analysts cover them. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I recommend you look at the following hurdles to assess SAIC’s financial health. Check out our latest analysis for Science Applications International

Is SAIC’s level of debt at an acceptable level?

While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. In the case of SAIC, the debt-to-equity ratio is over 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether SAIC’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. SAIC’s profits amply covers interest at 6 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Can SAIC pay its short-term liabilities?

Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess SAIC's cash and other liquid assets against its upcoming expenses. Our analysis shows that SAIC does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Next Steps:

Are you a shareholder? SAIC’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think SAIC can improve in terms of debt management and operational efficiency. Since SAIC’s capital structure may change, You should continue researching market expectations for SAIC’s future growth on our free analysis platform.

Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. SAIC’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

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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.