How Financially Strong Is Littelfuse Inc (NASDAQ:LFUS)?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Littelfuse Inc (NASDAQ:LFUS), with a market capitalization of US$4.6b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at LFUS’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into LFUS here.

Check out our latest analysis for Littelfuse

How much cash does LFUS generate through its operations?

LFUS has built up its total debt levels in the last twelve months, from US$502m to US$701m , which is made up of current and long term debt. With this rise in debt, LFUS's cash and short-term investments stands at US$498m for investing into the business. Moreover, LFUS has generated US$340m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 49%, indicating that LFUS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LFUS’s case, it is able to generate 0.49x cash from its debt capital.

Can LFUS pay its short-term liabilities?

At the current liabilities level of US$304m liabilities, the company has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 3.46x. Having said that, anything above 3x may be considered excessive by some investors. They might argue LFUS is leaving too much capital in low-earning investments.

Can LFUS service its debt comfortably?

LFUS is a relatively highly levered company with a debt-to-equity of 46%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether LFUS is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In LFUS's, case, the ratio of 13.81x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LFUS ample headroom to grow its debt facilities.

Next Steps:

LFUS’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 LFUS has company-specific issues impacting its capital structure decisions. You should continue to research Littelfuse to get a more holistic view of the mid-cap by looking at:

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