Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as T-Mobile US Inc (NASDAQ:TMUS) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. This article will examine T-Mobile US’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into TMUS here.
How does TMUS’s operating cash flow stack up against its debt?
TMUS’s debt level has been constant at around US$30.5b over the previous year comprising of short- and long-term debt. At this stable level of debt, TMUS currently has US$215m remaining in cash and short-term investments for investing into the business. Moreover, TMUS has produced cash from operations of US$8.3b in the last twelve months, leading to an operating cash to total debt ratio of 27%, meaning that TMUS’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 TMUS’s case, it is able to generate 0.27x cash from its debt capital.
Does TMUS’s liquid assets cover its short-term commitments?
Looking at TMUS’s most recent US$9.3b liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$7.1b, with a current ratio of 0.76x.
Can TMUS service its debt comfortably?
Considering T-Mobile US’s total debt outweighs its equity, the company is deemed highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if TMUS’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In TMUS’s case, the ratio of 3.24x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like TMUS are considered a risk-averse investment.
Although TMUS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure TMUS has company-specific issues impacting its capital structure decisions. I suggest you continue to research T-Mobile US to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TMUS’s future growth? Take a look at our free research report of analyst consensus for TMUS’s outlook.
- Valuation: What is TMUS 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 TMUS 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.