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There are a number of reasons that attract investors towards large-cap companies such as W.W. Grainger, Inc. (NYSE:GWW), with a market cap of US$15b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. Today we will look at W.W. Grainger’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GWW here.
Does GWW Produce Much Cash Relative To Its Debt?
GWW has sustained its debt level by about US$2.4b over the last 12 months including long-term debt. At this current level of debt, GWW currently has US$392m remaining in cash and short-term investments , ready to be used for running the business. Moreover, GWW has generated cash from operations of US$1.0b in the last twelve months, leading to an operating cash to total debt ratio of 43%, signalling that GWW’s operating cash is sufficient to cover its debt.
Can GWW pay its short-term liabilities?
With current liabilities at US$1.5b, the company has been able to meet these commitments with a current assets level of US$3.5b, leading to a 2.4x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does GWW face the risk of succumbing to its debt-load?
Considering W.W. Grainger’s total debt outweighs its equity, the company is deemed highly levered. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. 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. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GWW, the ratio of 18.22x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as GWW is a safe investment.
Although GWW’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 GWW’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how GWW has been performing in the past. You should continue to research W.W. Grainger to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GWW’s future growth? Take a look at our free research report of analyst consensus for GWW’s outlook.
- Valuation: What is GWW 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 GWW 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.