Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Toll Brothers, Inc. (NYSE:TOL), with a market capitalization of US$5.5b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at TOL’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TOL here.
TOL’s Debt (And Cash Flows)
TOL has sustained its debt level by about US$3.6b over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$802m to keep the business going. Additionally, TOL has generated cash from operations of US$747m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, signalling that TOL’s operating cash is sufficient to cover its debt.
Can TOL meet its short-term obligations with the cash in hand?
With current liabilities at US$1.3b, it appears that the company has been able to meet these commitments with a current assets level of US$9.0b, leading to a 7.17x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is TOL’s debt level acceptable?
TOL is a relatively highly levered company with a debt-to-equity of 74%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible.
TOL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around TOL’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for TOL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Toll Brothers to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TOL’s future growth? Take a look at our free research report of analyst consensus for TOL’s outlook.
- Valuation: What is TOL 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 TOL 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.
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