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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like HD Supply Holdings, Inc. (NASDAQ:HDS), with a market cap of US$7.5b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine HDS’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into HDS here.
How much cash does HDS generate through its operations?
HDS’s debt levels have fallen from US$2.1b to US$2.0b over the last 12 months – this includes long-term debt. With this debt payback, HDS’s cash and short-term investments stands at US$52m for investing into the business. On top of this, HDS has produced cash from operations of US$561m over the same time period, leading to an operating cash to total debt ratio of 28%, indicating that HDS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HDS’s case, it is able to generate 0.28x cash from its debt capital.
Can HDS pay its short-term liabilities?
At the current liabilities level of US$860m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. 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 5.37x 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.
Although HDS’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. Since there is also no concerns around HDS’s liquidity needs, this may be its optimal capital structure for the time being. 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 better picture of the mid-cap 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.