There are a number of reasons that attract investors towards large-cap companies such as Waste Management Inc (NYSE:WM), with a market cap of US$36.48B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. Today we will look at Waste Management’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 WM here. Check out our latest analysis for Waste Management
How does WM’s operating cash flow stack up against its debt?
WM has sustained its debt level by about US$9.49B over the last 12 months made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$22.00M for investing into the business. On top of this, WM has produced cash from operations of US$3.18B over the same time period, leading to an operating cash to total debt ratio of 33.51%, indicating that WM’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WM’s case, it is able to generate 0.34x cash from its debt capital.
Does WM’s liquid assets cover its short-term commitments?
With current liabilities at US$3.26B, it seems that the business is not able to meet these obligations given the level of current assets of US$2.62B, with a current ratio of 0.8x below the prudent level of 3x.
Can WM service its debt comfortably?
Since equity is smaller than total debt levels, Waste Management is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can put the sustainability of WM’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For WM, the ratio of 7.22x 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 WM are considered a risk-averse investment.
WM’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. However, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure WM has company-specific issues impacting its capital structure decisions. You should continue to research Waste Management to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WM’s future growth? Take a look at our free research report of analyst consensus for WM’s outlook.
- Valuation: What is WM 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 WM 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 pass 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.