Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as DocuSign, Inc. (NASDAQ:DOCU), with a market capitalization of US$9.4b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at DOCU’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DOCU here.
DOCU’s Debt (And Cash Flows)
DOCU has increased its debt level by about US$617m over the last 12 months accounting for long term debt. With this ramp up in debt, DOCU currently has US$752m remaining in cash and short-term investments to keep the business going. On top of this, DOCU has produced US$107m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 17%, indicating that DOCU’s operating cash is less than its debt.
Can DOCU pay its short-term liabilities?
With current liabilities at US$523m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.76x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Software companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is DOCU’s debt level acceptable?
With a debt-to-equity ratio of 75%, DOCU can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since DOCU is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
DOCU’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. This is only a rough assessment of financial health, and I'm sure DOCU has company-specific issues impacting its capital structure decisions. I suggest you continue to research DocuSign to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DOCU’s future growth? Take a look at our free research report of analyst consensus for DOCU’s outlook.
- Valuation: What is DOCU 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 DOCU 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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