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Are Target Corporation's (NYSE:TGT) Interest Costs Too High?

Simply Wall St

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There are a number of reasons that attract investors towards large-cap companies such as Target Corporation (NYSE:TGT), with a market cap of US$45b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. I will provide an overview of Target’s financial liquidity and leverage to give you an idea of Target’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into TGT here.

View our latest analysis for Target

TGT’s Debt (And Cash Flows)

Over the past year, TGT has ramped up its debt from US$14b to US$15b , which accounts for long term debt. With this increase in debt, TGT's cash and short-term investments stands at US$1.2b to keep the business going. Additionally, TGT has produced cash from operations of US$5.8b in the last twelve months, leading to an operating cash to total debt ratio of 39%, indicating that TGT’s debt is appropriately covered by operating cash.

Does TGT’s liquid assets cover its short-term commitments?

With current liabilities at US$13b, the company may not have an easy time meeting these commitments with a current assets level of US$12b, leading to a current ratio of 0.88x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:TGT Historical Debt, June 16th 2019

Does TGT face the risk of succumbing to its debt-load?

Target is a highly levered company given that total debt exceeds equity. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if TGT’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 TGT, the ratio of 9.28x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as TGT is a safe investment.

Next Steps:

TGT’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. Keep in mind I haven't considered other factors such as how TGT has been performing in the past. I recommend you continue to research Target to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TGT’s future growth? Take a look at our free research report of analyst consensus for TGT’s outlook.
  2. Valuation: What is TGT 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 TGT is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com. 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.