Yahoo Finance What Investors Should Know About Open Text Corporation's (NASDAQ:OTEX) Financial Strength
Investors pursuing a solid, dependable stock investment can often be led to Open Text Corporation (NASDAQ:OTEX), a large-cap worth US$11b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, its financial health remains the key to continued success. Let’s take a look at Open Text’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into OTEX here.
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OTEX’s Debt (And Cash Flows)
OTEX's debt level has been constant at around US$2.6b over the previous year which accounts for long term debt. At this stable level of debt, OTEX currently has US$765m remaining in cash and short-term investments , ready to be used for running the business. Moreover, OTEX has generated cash from operations of US$852m during the same period of time, leading to an operating cash to total debt ratio of 33%, signalling that OTEX’s operating cash is sufficient to cover its debt.
Does OTEX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.0b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. The current ratio is calculated by dividing current assets by current liabilities. For Software companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can OTEX service its debt comfortably?
With debt reaching 68% of equity, OTEX may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For OTEX, the ratio of 5.57x suggests that interest is well-covered. Large-cap investments like OTEX are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
OTEX’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. I admit this is a fairly basic analysis for OTEX's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Open Text to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for OTEX’s future growth? Take a look at our free research report of analyst consensus for OTEX’s outlook.
Valuation: What is OTEX 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 OTEX 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
