Is Lululemon Athletica Inc (NASDAQ:LULU) As Strong As Its Balance Sheet Indicates?
With a market capitalization of US$18.13b, Lululemon Athletica Inc (NASDAQ:LULU) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Assessing the most recent data for LULU, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
See our latest analysis for Lululemon Athletica
Does LULU produce enough cash relative to debt?
Over the past year, LULU has borrowed debt capital of around US$100.0m . With this growth in debt, LULU’s cash and short-term investments stands at US$777.8m for investing into the business. Moreover, LULU has generated cash from operations of US$597.3m during the same period of time, leading to an operating cash to total debt ratio of 597%, indicating that LULU’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LULU’s case, it is able to generate 5.97x cash from its debt capital.
Can LULU pay its short-term liabilities?
With current liabilities at US$449.2m, the company has been able to meet these obligations given the level of current assets of US$1.31b, with a current ratio of 2.91x. For Luxury companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LULU service its debt comfortably?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. With debt at 7.6% of equity, LULU may be thought of as having low leverage. This range is considered safe as LULU is not taking on too much debt obligation, which may be constraining for future growth.
Next Steps:
LULU has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how LULU has been performing in the past. I recommend you continue to research Lululemon Athletica to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LULU’s future growth? Take a look at our free research report of analyst consensus for LULU’s outlook.
Valuation: What is LULU 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 LULU 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
