Does Stericycle, Inc.'s (NASDAQ:SRCL) Debt Level Pose A Problem?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Stericycle, Inc. (NASDAQ:SRCL), with a market capitalization of US$4.0b, rarely draw their attention from the investing community. 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 SRCL’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. Don’t forget that this is a general and concentrated examination of Stericycle’s financial health, so you should conduct further analysis into SRCL here.

See our latest analysis for Stericycle

Want to help shape the future of investing tools? Participate in a short research study and receive a subscription valued at $60.

Does SRCL produce enough cash relative to debt?

Over the past year, SRCL has maintained its debt levels at around US$2.8b – this includes long-term debt. At this constant level of debt, SRCL's cash and short-term investments stands at US$52m , ready to deploy into the business. On top of this, SRCL has produced US$207m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 7.3%, meaning that SRCL’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SRCL’s case, it is able to generate 0.073x cash from its debt capital.

Can SRCL pay its short-term liabilities?

With current liabilities at US$749m, the company has been able to meet these commitments with a current assets level of US$803m, leading to a 1.07x current account ratio. Usually, for Commercial Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can SRCL service its debt comfortably?

SRCL is a relatively highly levered company with a debt-to-equity of 97%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SRCL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SRCL's, case, the ratio of 3.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SRCL ample headroom to grow its debt facilities.

Next Steps:

Although SRCL’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 SRCL's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SRCL's financial health. Other important fundamentals need to be considered alongside. You should continue to research Stericycle to get a more holistic view of the mid-cap by looking at:

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

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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.