Mid-caps stocks, like HD Supply Holdings Inc (NASDAQ:HDS) with a market capitalization of US$7.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at HDS’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HDS here.
How much cash does HDS generate through its operations?
HDS’s debt levels have fallen from US$4.1b to US$2.2b over the last 12 months – this includes both the current and long-term debt. With this debt repayment, HDS’s cash and short-term investments stands at US$228m for investing into the business. Moreover, HDS has generated US$499m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 23%, indicating that HDS’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 HDS’s case, it is able to generate 0.23x cash from its debt capital.
Does HDS’s liquid assets cover its short-term commitments?
At the current liabilities level of US$850m liabilities, the company has been able to meet these commitments with a current assets level of US$1.9b, leading to a 2.27x current account ratio. For Trade Distributors companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HDS face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, HDS is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 HDS’s case, the ratio of 5.04x suggests that interest is appropriately 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.
At its current level of cash flow coverage, HDS has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for HDS’s financial health. Other important fundamentals need to be considered alongside. You should continue to research HD Supply Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HDS’s future growth? Take a look at our free research report of analyst consensus for HDS’s outlook.
- Valuation: What is HDS 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 HDS 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.