Waters Corporation (NYSE:WAT), a large-cap worth US$17b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. This article will examine Waters’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into WAT here.
Does WAT Produce Much Cash Relative To Its Debt?
Over the past year, WAT has reduced its debt from US$2.0b to US$1.1b , which includes long-term debt. With this debt repayment, WAT’s cash and short-term investments stands at US$1.7b , ready to be used for running the business. Additionally, WAT has produced US$604m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 53%, signalling that WAT’s debt is appropriately covered by operating cash.
Does WAT’s liquid assets cover its short-term commitments?
With current liabilities at US$449m, the company has been able to meet these commitments with a current assets level of US$2.7b, leading to a 5.93x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is WAT’s debt level acceptable?
With a debt-to-equity ratio of 73%, WAT can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. 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. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For WAT, the ratio of 75.18x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as WAT is a safe investment.
WAT’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 WAT’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 WAT has been performing in the past. I suggest you continue to research Waters to get a more holistic view 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.
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