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Investors looking for stocks with high market liquidity and zero debt on the balance sheet should consider Ulta Beauty, Inc. (NASDAQ:ULTA). With a market valuation of US$21b, ULTA is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for ULTA, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
Does ULTA face the risk of succumbing to its debt-load?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For Ulta Beauty, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with ULTA, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does ULTA’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Ulta Beauty has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at US$1.0b, it appears that the company has been able to meet these commitments with a current assets level of US$2.0b, leading to a 1.93x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty Retail 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.
ULTA has zero debt in addition to ample cash to cover its short-term liabilities. Its strong balance sheet reduces risk for the company and its investors. Keep in mind I haven't considered other factors such as how ULTA has performed in the past. You should continue to research Ulta Beauty to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ULTA’s future growth? Take a look at our free research report of analyst consensus for ULTA’s outlook.
- Valuation: What is ULTA 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 ULTA 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.