There are a number of reasons that attract investors towards large-cap companies such as Waters Corporation (NYSE:WAT), with a market cap of US$16b. 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 Waters’s financial liquidity and leverage to give you an idea of Waters’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 WAT here.
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How much cash does WAT generate through its operations?
WAT has shrunken its total debt levels in the last twelve months, from US$2.0b to US$1.1b , which also accounts for long term debt. With this debt payback, WAT currently has US$2.1b remaining in cash and short-term investments for investing into the business. On top of this, WAT has generated cash from operations of US$615m over the same time period, resulting in an operating cash to total debt ratio of 54%, indicating that WAT’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 WAT’s case, it is able to generate 0.54x cash from its debt capital.
Does WAT’s liquid assets cover its short-term commitments?
With current liabilities at US$448m, it appears that the company has been able to meet these commitments with a current assets level of US$3.0b, leading to a 6.63x current account ratio. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can WAT service its debt comfortably?
With a debt-to-equity ratio of 61%, WAT can be considered as an above-average leveraged company. 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 assess the sustainability of WAT’s debt levels to the test by looking at how well interest payments are covered by earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For WAT, the ratio of 55.59x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes WAT and other large-cap investments thought to be safe.
Although WAT’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. Since there is also no concerns around WAT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for WAT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Waters to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WAT’s future growth? Take a look at our free research report of analyst consensus for WAT’s outlook.
- Valuation: What is WAT 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 WAT 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.