Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Michael Kors Holdings Limited (NYSE:KORS), with a market cap of US$6.6b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine KORS’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into KORS here.
How much cash does KORS generate through its operations?
KORS has increased its debt level by about US$760m over the last 12 months accounting for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$155m for investing into the business. Moreover, KORS has generated cash from operations of US$997m in the last twelve months, resulting in an operating cash to total debt ratio of 131%, meaning that KORS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In KORS’s case, it is able to generate 1.31x cash from its debt capital.
Does KORS’s liquid assets cover its short-term commitments?
Looking at KORS’s US$998m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.48x. For Luxury companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KORS service its debt comfortably?
KORS’s level of debt is appropriate relative to its total equity, at 35%. This range is considered safe as KORS is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if KORS’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 KORS, the ratio of 27.85x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as KORS’s high interest coverage is seen as responsible and safe practice.
KORS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 KORS has been performing in the past. You should continue to research Michael Kors Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KORS’s future growth? Take a look at our free research report of analyst consensus for KORS’s outlook.
- Valuation: What is KORS 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 KORS 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 email@example.com.