Mid-caps stocks, like Graham Holdings Company (NYSE:GHC) with a market capitalization of US$3.5b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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 GHC’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GHC here.
Does GHC Produce Much Cash Relative To Its Debt?
GHC’s debt level has been constant at around US$477m over the previous year including long-term debt. At this stable level of debt, GHC currently has US$768m remaining in cash and short-term investments , ready to be used for running the business. On top of this, GHC has produced US$287m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 60%, meaning that GHC’s debt is appropriately covered by operating cash.
Can GHC meet its short-term obligations with the cash in hand?
At the current liabilities level of US$812m, 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 1.89x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Consumer Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can GHC service its debt comfortably?
GHC’s level of debt is appropriate relative to its total equity, at 16%. 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 test if GHC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For GHC, the ratio of 11.52x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as GHC’s high interest coverage is seen as responsible and safe practice.
GHC’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for GHC’s financial health. Other important fundamentals need to be considered alongside. 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.
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 firstname.lastname@example.org. 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.