Financial Ratio Analysis on Intel Stock: Can the Turnaround Continue?

Source: Intel.

For decades, Intel (INTC 0.68%) commanded the semiconductor industry with its dominance of the PC-chip market. Yet as the mobile revolution developed, Intel fell behind, allowing Qualcomm (QCOM -0.94%) and other competitors to catch up and surpass the chip giant. That led to a period of retrenching for Intel stock and for its business overall. Lately, though, a resurgence on the PC side of its business has helped send Intel shares higher, and the question investors want answered is whether the company can see continued growth from its traditional area of mastery or whether it needs its initiatives on the mobile front to bear fruit in order to support its new growth.

To assess Intel's prospects, taking an in-depth look at its financial ratios is one way to get some valuable information. The right metrics can give you a deeper sense of how a company is truly performing. With that in mind, let's look at some select financial ratios for Intel.

Stats on Intel

Source: S&P Capital IQ.

1. Intel's net margins have remained impressive despite falling off from their best levels.
Intel's strength in the chip industry gave it the ability to generate impressive profit margins. Yet even though the company has lost some of its near-monopoly on making chips in the hottest new areas in the tech sector, Intel has still managed to keep its profit margins relatively high. Admittedly, Intel's margins don't compare favorably with the roughly 30% figures that Qualcomm has generated recently, but given the amount of intangible property that generates high-margin licensing revenue for Qualcomm, it's not entirely fair to compare those figures directly.

INTC Profit Margin (Annual) data by YCharts

Some have argued that Intel's move into the mobile market will inevitably cause its profit margins to decline. Yet as some of the larger producers of mobile chips have demonstrated, once a company reaches large enough scale in the industry, higher-margin opportunities are indeed available even in the mobile market. Intel's efforts haven't yet reached the scale that it will need to maximize its efficiency, but if it stays on its current course, then Intel has the ability to expand its margins even more and reach some of its historically higher levels in the years to come.

2. Despite taking on more debt, Intel won't have any trouble maintaining it or staying solvent.
Intel has increased its use of debt considerably in recent years, and that shows up quite clearly in the company's financial ratios. As you can see below, debt-to-equity ratios at Intel have climbed considerably over the past decade. When you look at other measures of immediate liquidity, such as the quick ratio and current ratio, you can see similar apparent deterioration in the financial ratios tied to solvency and stability.

INTC Debt to Equity Ratio (Annual) data by YCharts

Yet it's important to remember that these increases in Intel's leverage come from extremely low initial levels. Traditionally, Intel has used almost no debt, generating ample cash to fund its various business initiatives without the need for outside capital. Indeed, even the company's recent raises of capital appear motivated more by low interest rates than by absolute need, and investors should remain confident that Intel will simply pay off those amounts outstanding if they become burdensome. Most of Intel's larger competitors also have ample cash and little debt, making the entire tech industry look relatively healthy from a financial perspective.

3. Revenue growth has turned around, but will it achieve historical levels?
For a few years, Intel had trouble keeping its sales up. The drop in PC sales volumes actually caused Intel's revenue to decline at various points in Intel's recent past, and even occasional spurts of growth didn't entirely dispel concerns about Intel's ability to generate long-term sales growth.

INTC Revenue (Quarterly YoY Growth) data by YCharts

The resurgence of PC-related sales has led revenue growth to climb back upward again. Growth rates are still lagging behind the double-digit percentage annualized gains that have persisted over the longer run from Intel. But if PC-chip gains don't entirely disappear in the near future and as long as Intel can keep finding new success in mobile, there's a good chance that the company will return to its longer-term growth track in the near future.

Intel still looks strong
Intel's future has plenty of uncertainty, and the company will still have to determine the best way to balance its maximization of profit from its PC-related products with its capitalizing on the opportunity presented by the mobile industry. At least recently, though, Intel has recognized the need for both parts of its business to succeed, and the actions it takes now will have a decisive impact on how successful its future proves to be.