There are a number of reasons that attract investors towards large-cap companies such as Mastercard Incorporated (NYSE:MA), with a market cap of US$226.58b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. This article will examine Mastercard’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 MA here.
How does MA’s operating cash flow stack up against its debt?
Over the past year, MA has ramped up its debt from US$5.33b to US$5.86b , which is made up of current and long term debt. With this growth in debt, MA’s cash and short-term investments stands at US$7.75b for investing into the business. Additionally, MA has produced US$6.03b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 103%, indicating that MA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MA’s case, it is able to generate 1.03x cash from its debt capital.
Can MA pay its short-term liabilities?
With current liabilities at US$9.46b, it appears that the company has been able to meet these obligations given the level of current assets of US$14.31b, with a current ratio of 1.51x. Usually, for IT companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MA’s debt level acceptable?
Since equity is smaller than total debt levels, Mastercard is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether MA is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For MA, the ratio of 84.13x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as MA is a safe investment.
MA’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 MA’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how MA has been performing in the past. I suggest you continue to research Mastercard to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MA’s future growth? Take a look at our free research report of analyst consensus for MA’s outlook.
- Valuation: What is MA 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 MA 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 firstname.lastname@example.org.