U.S. Markets closed

What does Genuine Parts Company's (NYSE:GPC) Balance Sheet Tell Us About Its Future?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors pursuing a solid, dependable stock investment can often be led to Genuine Parts Company (NYSE:GPC), a large-cap worth US$14b. 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. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Genuine Parts’s financial liquidity and leverage to give you an idea of Genuine Parts’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GPC here.

Check out our latest analysis for Genuine Parts

Does GPC Produce Much Cash Relative To Its Debt?

GPC has built up its total debt levels in the last twelve months, from US$3.3b to US$4.4b – this includes long-term debt. With this growth in debt, GPC's cash and short-term investments stands at US$357m , ready to be used for running the business. Moreover, GPC has generated cash from operations of US$1.1b in the last twelve months, resulting in an operating cash to total debt ratio of 24%, meaning that GPC’s operating cash is sufficient to cover its debt.

Can GPC pay its short-term liabilities?

Looking at GPC’s US$6.5b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. The current ratio is calculated by dividing current assets by current liabilities. For Retail Distributors companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:GPC Historical Debt, May 31st 2019

Can GPC service its debt comfortably?

With total debt exceeding equities, Genuine Parts is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. 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. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In GPC's case, the ratio of 12.74x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as GPC is a safe investment.

Next Steps:

GPC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure GPC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Genuine Parts to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GPC’s future growth? Take a look at our free research report of analyst consensus for GPC’s outlook.
  2. Valuation: What is GPC 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 GPC is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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.