Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Stitch Fix, Inc. (NASDAQ:SFIX), with a market cap of US$2.4b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at SFIX’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SFIX here.
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Can SFIX service its debt comfortably?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, mid-cap stocks are considered financially healthy if its ratio is below 40%. The good news for investors is that Stitch Fix has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with SFIX, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can SFIX pay its short-term liabilities?
Since Stitch Fix doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at US$177m, the company has been able to meet these obligations given the level of current assets of US$413m, with a current ratio of 2.33x. The current ratio is calculated by dividing current assets by current liabilities. 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.
SFIX has no debt as well as ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and its investors, but some level of debt may also boost earnings growth and operational efficiency. Keep in mind I haven't considered other factors such as how SFIX has performed in the past. I recommend you continue to research Stitch Fix to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SFIX’s future growth? Take a look at our free research report of analyst consensus for SFIX’s outlook.
- Valuation: What is SFIX 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 SFIX 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
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