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Stocks with market capitalization between $2B and $10B, such as Stitch Fix, Inc. (NASDAQ:SFIX) with a size of US$2.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at SFIX’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Stitch Fix’s financial health, so you should conduct further analysis into SFIX here.
Does SFIX face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For SFIX, the debt-to-equity ratio is zero, meaning that the company 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 meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Stitch Fix has no solvency issues, which is 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$192m, it seems that the business has been able to meet these commitments with a current assets level of US$398m, leading to a 2.07x current account ratio. Usually, for Online Retail companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
SFIX has zero-debt as well as ample cash to cover its near-term liabilities. Its safe operations reduces risk for the company and shareholders, though, some level of debt may also ramp up earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure SFIX has company-specific issues impacting its capital structure decisions. I suggest 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.
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.