Yahoo Finance What Investors Should Know About Broadcom Inc’s (NASDAQ:AVGO) Financial Strength
Investors pursuing a solid, dependable stock investment can often be led to Broadcom Inc (NASDAQ:AVGO), a large-cap worth US$107.31B. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. Let’s take a look at Broadcom’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 AVGO here. Check out our latest analysis for Broadcom
How much cash does AVGO generate through its operations?
Over the past year, AVGO has ramped up its debt from US$13.64B to US$17.55B – this includes both the current and long-term debt. With this rise in debt, AVGO’s cash and short-term investments stands at US$11.20B , ready to deploy into the business. Moreover, AVGO has produced US$6.55B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 37.33%, meaning that AVGO’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 AVGO’s case, it is able to generate 0.37x cash from its debt capital.
Can AVGO meet its short-term obligations with the cash in hand?
Looking at AVGO’s most recent US$2.53B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.26x. Though, anything about 3x may be excessive, since AVGO may be leaving too much capital in low-earning investments.
Is AVGO’s debt level acceptable?
With a debt-to-equity ratio of 54.88%, AVGO can be considered as an above-average leveraged company. 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. Accordingly, large companies often have lower cost of capital due to easily obtained 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. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For AVGO, the ratio of 8.08x suggests that interest is well-covered. Large-cap investments like AVGO are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although AVGO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 AVGO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Broadcom to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for AVGO’s future growth? Take a look at our free research report of analyst consensus for AVGO’s outlook.
Valuation: What is AVGO 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 AVGO 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.
