Mid-caps stocks, like Williams-Sonoma, Inc. (NYSE:WSM) with a market capitalization of US$4.2b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. WSM’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WSM here.
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Does WSM Produce Much Cash Relative To Its Debt?
Over the past year, WSM has maintained its debt levels at around US$300m including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$339m , ready to be used for running the business. Moreover, WSM has generated cash from operations of US$586m during the same period of time, leading to an operating cash to total debt ratio of 196%, signalling that WSM’s current level of operating cash is high enough to cover debt.
Can WSM meet its short-term obligations with the cash in hand?
Looking at WSM’s US$1.1b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$1.7b, leading to a 1.58x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Specialty 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.
Is WSM’s debt level acceptable?
WSM’s level of debt is appropriate relative to its total equity, at 26%. This range is considered safe as WSM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if WSM’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 WSM, the ratio of 65.85x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WSM ample headroom to grow its debt facilities.
WSM’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how WSM has been performing in the past. You should continue to research Williams-Sonoma to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WSM’s future growth? Take a look at our free research report of analyst consensus for WSM’s outlook.
- Valuation: What is WSM 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 WSM 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.