Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Tech Data Corporation (NASDAQ:TECD), with a market cap of US$3.5b, often get neglected by retail investors. 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. TECD’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TECD here.
Does TECD Produce Much Cash Relative To Its Debt?
TECD’s debt levels have fallen from US$1.9b to US$1.4b over the last 12 months , which includes long-term debt. With this debt payback, TECD currently has US$646m remaining in cash and short-term investments to keep the business going. Additionally, TECD has generated cash from operations of US$805m in the last twelve months, resulting in an operating cash to total debt ratio of 57%, indicating that TECD’s current level of operating cash is high enough to cover debt.
Can TECD pay its short-term liabilities?
With current liabilities at US$8.2b, the company has been able to meet these commitments with a current assets level of US$10b, leading to a 1.24x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Electronic 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.
Can TECD service its debt comfortably?
TECD is a relatively highly levered company with a debt-to-equity of 50%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if TECD’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TECD, the ratio of 5.25x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
TECD’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 TECD’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for TECD’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tech Data to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TECD’s future growth? Take a look at our free research report of analyst consensus for TECD’s outlook.
- Valuation: What is TECD 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 TECD 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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