How Financially Strong Is Abercrombie & Fitch Co (NYSE:ANF)?

While small-cap stocks, such as Abercrombie & Fitch Co (NYSE:ANF) with its market cap of US$1.86b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into ANF here.

How much cash does ANF generate through its operations?

Over the past year, ANF has maintained its debt levels at around US$298.9m made up of current and long term debt. At this constant level of debt, ANF currently has US$592.0m remaining in cash and short-term investments , ready to deploy into the business. Moreover, ANF has generated US$353.7m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 118%, meaning that ANF’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ANF’s case, it is able to generate 1.18x cash from its debt capital.

Can ANF pay its short-term liabilities?

With current liabilities at US$461.6m, it appears that the company has been able to meet these obligations given the level of current assets of US$1.17b, with a current ratio of 2.54x. Generally, for Specialty 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.

Can ANF service its debt comfortably?

ANF’s level of debt is appropriate relative to its total equity, at 25.1%. ANF is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ANF’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 ANF, the ratio of 7.9x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

ANF’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how ANF has been performing in the past. I recommend you continue to research Abercrombie & Fitch to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ANF’s future growth? Take a look at our free research report of analyst consensus for ANF’s outlook.
2. Valuation: What is ANF 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 ANF is currently mispriced by the market.
3. 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.