Yahoo Finance Lumentum Holdings Inc (NASDAQ:LITE): Financial Strength Analysis
Stocks with market capitalization between $2B and $10B, such as Lumentum Holdings Inc (NASDAQ:LITE) with a size of US$3.63b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. LITE’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 LITE here. Check out our latest analysis for Lumentum Holdings
How does LITE’s operating cash flow stack up against its debt?
LITE has increased its debt level by about US$317.50m over the last 12 months – this includes both the current and long-term debt. With this ramp up in debt, LITE currently has US$555.30m remaining in cash and short-term investments , ready to deploy into the business. On top of this, LITE has produced US$85.00m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 26.77%, meaning that LITE’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LITE’s case, it is able to generate 0.27x cash from its debt capital.
Does LITE’s liquid assets cover its short-term commitments?
With current liabilities at US$184.20m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.05x. However, a ratio greater than 3x may be considered as too high, as LITE could be holding too much capital in a low-return investment environment.
Is LITE’s debt level acceptable?
With debt at 34.95% of equity, LITE may be thought of as appropriately levered. LITE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if LITE’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 LITE, the ratio of 10.46x suggests that interest is comfortably 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.
Next Steps:
LITE’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure LITE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Lumentum Holdings to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LITE’s future growth? Take a look at our free research report of analyst consensus for LITE’s outlook.
Valuation: What is LITE 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 LITE 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.
To help readers see pass 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.
