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Mid-caps stocks, like Groupon, Inc. (NASDAQ:GRPN) with a market capitalization of US$2.0b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. GRPN’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GRPN here.
How does GRPN’s operating cash flow stack up against its debt?
GRPN has shrunken its total debt levels in the last twelve months, from US$234m to US$202m , which includes long-term debt. With this debt payback, GRPN currently has US$841m remaining in cash and short-term investments , ready to deploy into the business. On top of this, GRPN has generated cash from operations of US$191m over the same time period, resulting in an operating cash to total debt ratio of 95%, indicating that GRPN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In GRPN’s case, it is able to generate 0.95x cash from its debt capital.
Can GRPN meet its short-term obligations with the cash in hand?
With current liabilities at US$957m, the company has been able to meet these obligations given the level of current assets of US$999m, with a current ratio of 1.04x. Generally, for Online Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does GRPN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 53%, GRPN can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since GRPN is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
GRPN’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 GRPN’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure GRPN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Groupon to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GRPN’s future growth? Take a look at our free research report of analyst consensus for GRPN’s outlook.
- Valuation: What is GRPN 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 GRPN 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 firstname.lastname@example.org.