There are a number of reasons that attract investors towards large-cap companies such as Target Corporation (NYSE:TGT), with a market cap of US$37b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. This article will examine Target’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TGT here.
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TGT’s Debt (And Cash Flows)
TGT’s debt level has been constant at around US$13b over the previous year including long-term debt. At this stable level of debt, TGT’s cash and short-term investments stands at US$1.6b to keep the business going. Additionally, TGT has generated US$6.0b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 44%, indicating that TGT’s debt is appropriately covered by operating cash.
Can TGT meet its short-term obligations with the cash in hand?
Looking at TGT’s US$15b in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$13b, leading to a current ratio of 0.83x. The current ratio is calculated by dividing current assets by current liabilities.
Is TGT’s debt level acceptable?
Considering Target’s total debt outweighs its equity, the company is deemed highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of TGT’s debt levels to the test by looking at how well interest payments are covered by earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In TGT’s case, the ratio of 9.17x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as TGT is a safe investment.
Although TGT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure TGT has company-specific issues impacting its capital structure decisions. You should continue to research Target to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TGT’s future growth? Take a look at our free research report of analyst consensus for TGT’s outlook.
- Valuation: What is TGT 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 TGT 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.
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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.