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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Gentex Corporation (NASDAQ:GNTX), with a market capitalization of US$6.2b, rarely draw their attention from the investing community. 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. GNTX’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into GNTX here.
Does GNTX face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For Gentex, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with GNTX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does GNTX’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Gentex has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at GNTX’s US$184m in current liabilities, the company has been able to meet these commitments with a current assets level of US$886m, leading to a 4.8x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
GNTX has zero-debt as well as ample cash to cover its near-term commitments. Its safe operations reduces risk for the company and shareholders, but some level of debt could also boost earnings growth and operational efficiency. This is only a rough assessment of financial health, and I'm sure GNTX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Gentex to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GNTX’s future growth? Take a look at our free research report of analyst consensus for GNTX’s outlook.
- Valuation: What is GNTX 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 GNTX 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.