Mid-caps stocks, like Stamps.com Inc. (NASDAQ:STMP) with a market capitalization of US$3.0b, 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. This article will examine STMP’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. Don’t forget that this is a general and concentrated examination of Stamps.com's financial health, so you should conduct further analysis into STMP here.
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Does STMP produce enough cash relative to debt?
Over the past year, STMP has reduced its debt from US$148m to US$81m – this includes long-term debt. With this reduction in debt, STMP's cash and short-term investments stands at US$78m , ready to deploy into the business. On top of this, STMP has produced cash from operations of US$209m over the same time period, leading to an operating cash to total debt ratio of 258%, indicating that STMP’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In STMP’s case, it is able to generate 2.58x cash from its debt capital.
Can STMP pay its short-term liabilities?
At the current liabilities level of US$130m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. For Online Retail companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is STMP’s debt level acceptable?
STMP’s level of debt is appropriate relative to its total equity, at 12%. STMP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if STMP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For STMP, the ratio of 77.94x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as STMP’s high interest coverage is seen as responsible and safe practice.
Next Steps:
STMP has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure STMP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Stamps.com to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STMP’s future growth? Take a look at our free research report of analyst consensus for STMP’s outlook.
- Valuation: What is STMP 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 STMP 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.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.