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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as PVH Corp. (NYSE:PVH), with a market cap of US$6.7b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. PVH’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of PVH’s financial health, so you should conduct further analysis into PVH here.
PVH’s Debt (And Cash Flows)
PVH's debt levels surged from US$3.3b to US$4.9b over the last 12 months – this includes long-term debt. With this increase in debt, PVH currently has US$495m remaining in cash and short-term investments to keep the business going. Additionally, PVH has generated cash from operations of US$905m during the same period of time, leading to an operating cash to total debt ratio of 18%, signalling that PVH’s current level of operating cash is not high enough to cover debt.
Does PVH’s liquid assets cover its short-term commitments?
At the current liabilities level of US$2.2b, the company has been able to meet these obligations given the level of current assets of US$3.3b, with a current ratio of 1.47x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PVH’s debt level acceptable?
PVH is a relatively highly levered company with a debt-to-equity of 54%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if PVH’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 PVH, the ratio of 8.43x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although PVH’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how PVH has been performing in the past. You should continue to research PVH to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PVH’s future growth? Take a look at our free research report of analyst consensus for PVH’s outlook.
- Valuation: What is PVH 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 PVH 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.