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Are WestRock Company's (NYSE:WRK) Interest Costs Too High?

Simply Wall St

Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as WestRock Company (NYSE:WRK) with a market-capitalization of US$9.6b, rarely draw their attention. 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. Today we will look at WRK’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into WRK here.

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WRK’s Debt (And Cash Flows)

WRK's debt levels surged from US$6.7b to US$11b over the last 12 months – this includes long-term debt. With this rise in debt, WRK currently has US$154m remaining in cash and short-term investments , ready to be used for running the business. On top of this, WRK has generated cash from operations of US$2.6b during the same period of time, leading to an operating cash to total debt ratio of 24%, meaning that WRK’s debt is appropriately covered by operating cash.

Can WRK meet its short-term obligations with the cash in hand?

With current liabilities at US$4.0b, it seems that the business has been able to meet these commitments with a current assets level of US$5.2b, leading to a 1.29x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Packaging companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:WRK Historical Debt, May 16th 2019

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

With a debt-to-equity ratio of 93%, WRK can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In WRK's case, the ratio of 4.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WRK ample headroom to grow its debt facilities.

Next Steps:

Although WRK’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. This is only a rough assessment of financial health, and I'm sure WRK has company-specific issues impacting its capital structure decisions. I recommend you continue to research WestRock to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WRK’s future growth? Take a look at our free research report of analyst consensus for WRK’s outlook.
  2. Valuation: What is WRK 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 WRK 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.