There are a number of reasons that attract investors towards large-cap companies such as The Williams Companies, Inc. (NYSE:WMB), with a market cap of US$34b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. This article will examine Williams Companies’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into WMB here.
WMB’s Debt (And Cash Flows)
WMB’s debt levels surged from US$21b to US$22b over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$168m to keep the business going. On top of this, WMB has produced US$3.3b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15%, meaning that WMB’s operating cash is less than its debt.
Can WMB meet its short-term obligations with the cash in hand?
Looking at WMB’s US$1.8b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$1.5b, with a current ratio of 0.81x. The current ratio is the number you get when you divide current assets by current liabilities.
Can WMB service its debt comfortably?
Since equity is smaller than total debt levels, Williams Companies is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. However, since WMB 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.
WMB’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how WMB has been performing in the past. I suggest you continue to research Williams Companies to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WMB’s future growth? Take a look at our free research report of analyst consensus for WMB’s outlook.
- Valuation: What is WMB 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 WMB 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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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.