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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Tractor Supply Company (NASDAQ:TSCO) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. This article will examine Tractor Supply’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 TSCO here.
Does TSCO Produce Much Cash Relative To Its Debt?
Over the past year, TSCO has ramped up its debt from US$740m to US$2.8b – this includes long-term debt. With this increase in debt, TSCO's cash and short-term investments stands at US$104m to keep the business going. On top of this, TSCO has produced cash from operations of US$703m in the last twelve months, leading to an operating cash to total debt ratio of 25%, meaning that TSCO’s debt is appropriately covered by operating cash.
Does TSCO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.3b, the company has been able to meet these obligations given the level of current assets of US$2.1b, with a current ratio of 1.58x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Specialty Retail 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.
Does TSCO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 44%, TSCO can be considered as an above-average leveraged company. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. By measuring how many times TSCO’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In TSCO's case, the ratio of 37.76x suggests that interest is comfortably covered. Large-cap investments like TSCO are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
TSCO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how TSCO has been performing in the past. You should continue to research Tractor Supply to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSCO’s future growth? Take a look at our free research report of analyst consensus for TSCO’s outlook.
- Valuation: What is TSCO 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 TSCO 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.