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There are a number of reasons that attract investors towards large-cap companies such as George Weston Limited (TSE:WN), with a market cap of CA$15b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, its financial health remains the key to continued success. I will provide an overview of George Weston’s financial liquidity and leverage to give you an idea of George Weston’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WN here.
Does WN Produce Much Cash Relative To Its Debt?
WN has built up its total debt levels in the last twelve months, from CA$13b to CA$17b – this includes long-term debt. With this increase in debt, WN currently has CA$1.8b remaining in cash and short-term investments to keep the business going. On top of this, WN has produced cash from operations of CA$2.7b in the last twelve months, resulting in an operating cash to total debt ratio of 16%, meaning that WN’s debt is not covered by operating cash.
Can WN pay its short-term liabilities?
With current liabilities at CA$9.6b, it appears that the company has been able to meet these obligations given the level of current assets of CA$12b, with a current ratio of 1.23x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Retailing companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can WN service its debt comfortably?
Considering George Weston’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times WN’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For WN, the ratio of 3.59x suggests that interest is well-covered. Large-cap investments like WN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
WN’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure WN has company-specific issues impacting its capital structure decisions. I recommend you continue to research George Weston to get a better picture of the stock by looking at:
- Valuation: What is WN 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 WN is currently mispriced by the market.
- Historical Performance: What has WN's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 firstname.lastname@example.org. 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.