There are a number of reasons that attract investors towards large-cap companies such as WellCare Health Plans, Inc. (NYSE:WCG), with a market cap of US$12b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, its financial health remains the key to continued success. I will provide an overview of WellCare Health Plans’s financial liquidity and leverage to give you an idea of WellCare Health Plans’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WCG here.
Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
Does WCG Produce Much Cash Relative To Its Debt?
WCG has built up its total debt levels in the last twelve months, from US$1.2b to US$2.1b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$4.5b to keep the business going. On top of this, WCG has produced cash from operations of US$279m during the same period of time, leading to an operating cash to total debt ratio of 13%, indicating that WCG’s operating cash is less than its debt.
Does WCG’s liquid assets cover its short-term commitments?
Looking at WCG’s US$5.2b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.31x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Healthcare companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is WCG’s debt level acceptable?
WCG is a relatively highly levered company with a debt-to-equity of 50%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For WCG, the ratio of 9.37x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes WCG and other large-cap investments thought to be safe.
WCG’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 an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure WCG has company-specific issues impacting its capital structure decisions. I suggest you continue to research WellCare Health Plans to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WCG’s future growth? Take a look at our free research report of analyst consensus for WCG’s outlook.
- Valuation: What is WCG 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 WCG 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 email@example.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.