Stocks with market capitalization between $2B and $10B, such as Ralph Lauren Corporation (NYSE:RL) with a size of US$9.8b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine RL’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RL here.
Does RL produce enough cash relative to debt?
RL’s debt level has been constant at around US$935m over the previous year including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$2.1b , ready to deploy into the business. Moreover, RL has produced US$707m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 76%, meaning that RL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RL’s case, it is able to generate 0.76x cash from its debt capital.
Can RL meet its short-term obligations with the cash in hand?
Looking at RL’s US$1.3b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$3.7b, leading to a 2.9x current account ratio. For Luxury 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.
Is RL’s debt level acceptable?
With a debt-to-equity ratio of 28%, RL’s debt level may be seen as prudent. RL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
RL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for RL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ralph Lauren to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RL’s future growth? Take a look at our free research report of analyst consensus for RL’s outlook.
- Valuation: What is RL 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 RL 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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