Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Amazoncom Inc (NASDAQ:AMZN) a safer option. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to extending previous success is in the health of the company’s financials. Today we will look at Amazon.com’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AMZN here.
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How much cash does AMZN generate through its operations?
AMZN’s debt levels surged from US$43.2b to US$47.2b over the last 12 months – this includes both the current and long-term debt. With this increase in debt, AMZN’s cash and short-term investments stands at US$29.8b , ready to deploy into the business. On top of this, AMZN has generated cash from operations of US$26.7b in the last twelve months, leading to an operating cash to total debt ratio of 56%, indicating that AMZN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In AMZN’s case, it is able to generate 0.56x cash from its debt capital.
Can AMZN meet its short-term obligations with the cash in hand?
With current liabilities at US$55.3b, it appears that the company has been able to meet these obligations given the level of current assets of US$59.9b, with a current ratio of 1.08x. Usually, for Online Retail companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does AMZN face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Amazon.com is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if AMZN’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In AMZN’s case, the ratio of 10.62x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes AMZN and other large-cap investments thought to be safe.
Next Steps:
AMZN’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure AMZN has company-specific issues impacting its capital structure decisions. You should continue to research Amazon.com to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMZN’s future growth? Take a look at our free research report of analyst consensus for AMZN’s outlook.
- Valuation: What is AMZN 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 AMZN 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 editorial-team@simplywallst.com.