Is McKesson Corporation’s (NYSE:MCK) Balance Sheet Strong Enough To Weather A Storm?
McKesson Corporation (NYSE:MCK), a large-cap worth US$24b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. Today we will look at McKesson’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into MCK here.
See our latest analysis for McKesson
How does MCK’s operating cash flow stack up against its debt?
Over the past year, MCK has ramped up its debt from US$9.0b to US$9.8b , which includes long-term debt. With this rise in debt, MCK currently has US$1.8b remaining in cash and short-term investments , ready to deploy into the business. Additionally, MCK has generated US$3.2b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32%, meaning that MCK’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In MCK’s case, it is able to generate 0.32x cash from its debt capital.
Can MCK pay its short-term liabilities?
At the current liabilities level of US$37b, it appears that the company has been able to meet these obligations given the level of current assets of US$38b, with a current ratio of 1.02x. Generally, for Healthcare companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is MCK’s debt level acceptable?
With a debt-to-equity ratio of 91%, MCK can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. However, since MCK is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although MCK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around MCK’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 MCK has been performing in the past. You should continue to research McKesson to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for MCK’s future growth? Take a look at our free research report of analyst consensus for MCK’s outlook.
Valuation: What is MCK 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 MCK 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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