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Stocks with market capitalization between $2B and $10B, such as Marriott Vacations Worldwide Corporation (NYSE:VAC) with a size of US$4.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at VAC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into VAC here.
VAC’s Debt (And Cash Flows)
VAC's debt levels surged from US$1.0b to US$4.0b over the last 12 months – this includes long-term debt. With this increase in debt, VAC currently has US$222m remaining in cash and short-term investments , ready to be used for running the business. On top of this, VAC has generated US$102m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 2.5%, signalling that VAC’s operating cash is less than its debt.
Can VAC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$1.0b, the company has been able to meet these commitments with a current assets level of US$3.8b, leading to a 3.82x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Does VAC face the risk of succumbing to its debt-load?
With total debt exceeding equity, VAC is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if VAC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For VAC, the ratio of 4.5x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
VAC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around VAC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for VAC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Marriott Vacations Worldwide to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VAC’s future growth? Take a look at our free research report of analyst consensus for VAC’s outlook.
- Valuation: What is VAC 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 VAC 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.