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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Williams-Sonoma, Inc. (NYSE:WSM), with a market cap of US$4.5b, are often out of the spotlight. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine WSM’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into WSM here.
Does WSM produce enough cash relative to debt?
WSM has built up its total debt levels in the last twelve months, from US$170m to US$360m , which accounts for long term debt. With this growth in debt, WSM currently has US$164m remaining in cash and short-term investments for investing into the business. On top of this, WSM has generated US$566m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 157%, signalling that WSM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WSM’s case, it is able to generate 1.57x cash from its debt capital.
Does WSM’s liquid assets cover its short-term commitments?
With current liabilities at US$1.0b, the company has been able to meet these commitments with a current assets level of US$1.6b, leading to a 1.54x current account ratio. For Specialty Retail companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WSM’s debt level acceptable?
WSM’s level of debt is appropriate relative to its total equity, at 33%. This range is considered safe as WSM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if WSM’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 WSM, the ratio of 81.73x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as WSM’s high interest coverage is seen as responsible and safe practice.
WSM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure WSM has company-specific issues impacting its capital structure decisions. I recommend you continue to research Williams-Sonoma to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WSM’s future growth? Take a look at our free research report of analyst consensus for WSM’s outlook.
- Valuation: What is WSM 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 WSM 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.