Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Graham Holdings Company (NYSE:GHC), with a market cap of US$3.5b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. GHC’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Graham Holdings’s financial health, so you should conduct further analysis into GHC here.
How much cash does GHC generate through its operations?
GHC’s debt level has been constant at around US$480m over the previous year – this includes long-term debt. At this stable level of debt, GHC currently has US$783m remaining in cash and short-term investments for investing into the business. Additionally, GHC has produced US$239m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 50%, indicating that GHC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GHC’s case, it is able to generate 0.5x cash from its debt capital.
Can GHC meet its short-term obligations with the cash in hand?
With current liabilities at US$804m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.91x. For Consumer Services 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.
Is GHC’s debt level acceptable?
With debt at 16% of equity, GHC may be thought of as appropriately levered. This range is considered safe as GHC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether GHC 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 GHC’s, case, the ratio of 9.64x 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.
GHC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure GHC has company-specific issues impacting its capital structure decisions. I suggest you continue to research Graham Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GHC’s future growth? Take a look at our free research report of analyst consensus for GHC’s outlook.
- Valuation: What is GHC 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 GHC 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.