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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Treasury Wine Estates Limited (ASX:TWE), with a market cap of AU$12b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine TWE’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 top-level understanding, so I encourage you to look further into TWE here.
Does TWE Produce Much Cash Relative To Its Debt?
Over the past year, TWE has ramped up its debt from AU$699m to AU$1.1b , which includes long-term debt. With this rise in debt, TWE's cash and short-term investments stands at AU$183m , ready to be used for running the business. Additionally, TWE has produced AU$204m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 18%, signalling that TWE’s debt is not covered by operating cash.
Does TWE’s liquid assets cover its short-term commitments?
With current liabilities at AU$843m, it appears that the company has been able to meet these obligations given the level of current assets of AU$2.1b, with a current ratio of 2.55x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Beverage companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is TWE’s debt level acceptable?
With debt at 31% of equity, TWE may be thought of as appropriately levered. This range is considered safe as TWE is not taking on too much debt obligation, which may be constraining for future growth. We can test if TWE’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 TWE, the ratio of 14.08x suggests that interest is comfortably 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 TWE’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how TWE has been performing in the past. I recommend you continue to research Treasury Wine Estates to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TWE’s future growth? Take a look at our free research report of analyst consensus for TWE’s outlook.
- Valuation: What is TWE 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 TWE 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.