Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as WestRock Company (NYSE:WRK) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. I will provide an overview of WestRock’s financial liquidity and leverage to give you an idea of WestRock’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WRK here.
Does WRK produce enough cash relative to debt?
Over the past year, WRK has maintained its debt levels at around US$6.4b including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$637m , ready to deploy into the business. On top of this, WRK has produced US$2.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 38%, meaning that WRK’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WRK’s case, it is able to generate 0.38x cash from its debt capital.
Can WRK pay its short-term liabilities?
At the current liabilities level of US$3.3b, it seems that the business has been able to meet these obligations given the level of current assets of US$4.8b, with a current ratio of 1.44x. Usually, for Packaging 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.
Can WRK service its debt comfortably?
WRK is a relatively highly levered company with a debt-to-equity of 56%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times WRK’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In WRK’s case, the ratio of 5.55x suggests that interest is appropriately covered. Large-cap investments like WRK are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
WRK’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 WRK’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how WRK has been performing in the past. I recommend you continue to research WestRock to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WRK’s future growth? Take a look at our free research report of analyst consensus for WRK’s outlook.
- Valuation: What is WRK 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 WRK 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 email@example.com.