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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as ServiceMaster Global Holdings, Inc. (NYSE:SERV), with a market cap of US$7.3b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at SERV’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. Don’t forget that this is a general and concentrated examination of ServiceMaster Global Holdings’s financial health, so you should conduct further analysis into SERV here.
Does SERV Produce Much Cash Relative To Its Debt?
Over the past year, SERV has reduced its debt from US$2.7b to US$1.5b – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$255m , ready to be used for running the business. On top of this, SERV has generated cash from operations of US$322m during the same period of time, resulting in an operating cash to total debt ratio of 22%, meaning that SERV’s current level of operating cash is high enough to cover debt.
Does SERV’s liquid assets cover its short-term commitments?
With current liabilities at US$442m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.24x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can SERV service its debt comfortably?
With debt reaching 59% of equity, SERV may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SERV is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
SERV’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 SERV's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ServiceMaster Global Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SERV’s future growth? Take a look at our free research report of analyst consensus for SERV’s outlook.
- Valuation: What is SERV 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 SERV 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.
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 email@example.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.