Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Shake Shack Inc. (NYSE:SHAK), with a market cap of US$2.2b, are often out of the spotlight. 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. Today we will look at SHAK’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 SHAK here.
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SHAK’s Debt (And Cash Flows)
SHAK’s debt levels surged from US$17m to US$296m over the last 12 months , which accounts for long term debt. With this increase in debt, SHAK’s cash and short-term investments stands at US$80m to keep the business going. Additionally, SHAK has produced cash from operations of US$83m over the same time period, resulting in an operating cash to total debt ratio of 28%, indicating that SHAK’s debt is appropriately covered by operating cash.
Does SHAK’s liquid assets cover its short-term commitments?
With current liabilities at US$79m, it seems that the business has been able to meet these obligations given the level of current assets of US$92m, with a current ratio of 1.17x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Hospitality companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SHAK’s debt level acceptable?
SHAK is a highly-leveraged company with debt exceeding equity by over 100%. 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 SHAK 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 SHAK’s, case, the ratio of 41.66x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SHAK’s high interest coverage is seen as responsible and safe practice.
Although SHAK’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SHAK has been performing in the past. I recommend you continue to research Shake Shack to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SHAK’s future growth? Take a look at our free research report of analyst consensus for SHAK’s outlook.
- Valuation: What is SHAK 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 SHAK 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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