Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Stryker Corporation (NYSE:SYK) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. I will provide an overview of Stryker’s financial liquidity and leverage to give you an idea of Stryker’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SYK here.
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SYK’s Debt (And Cash Flows)
SYK has built up its total debt levels in the last twelve months, from US$7.9b to US$8.8b – this includes long-term debt. With this rise in debt, SYK currently has US$1.8b remaining in cash and short-term investments , ready to be used for running the business. Moreover, SYK has generated US$2.6b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, indicating that SYK’s current level of operating cash is high enough to cover debt.
Does SYK’s liquid assets cover its short-term commitments?
At the current liabilities level of US$3.7b, the company has been able to meet these obligations given the level of current assets of US$7.9b, with a current ratio of 2.12x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Medical Equipment 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.
Is SYK’s debt level acceptable?
With debt reaching 75% of equity, SYK may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether SYK 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. For SYK, the ratio of 24.46x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SYK are considered a risk-averse investment.
Although SYK’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 SYK has been performing in the past. You should continue to research Stryker to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SYK’s future growth? Take a look at our free research report of analyst consensus for SYK’s outlook.
- Valuation: What is SYK 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 SYK 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 email@example.com. 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.