There are a number of reasons that attract investors towards large-cap companies such as Square Inc (NYSE:SQ), with a market cap of US$30b. 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 Square’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. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into SQ here.
View our latest analysis for Square
How much cash does SQ generate through its operations?
SQ’s debt levels surged from US$358m to US$1.0b over the last 12 months , which accounts for long term debt. With this growth in debt, SQ currently has US$1.2b remaining in cash and short-term investments for investing into the business. On top of this, SQ has generated US$116m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 11%, meaning that SQ’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In SQ’s case, it is able to generate 0.11x cash from its debt capital.
Can SQ pay its short-term liabilities?
Looking at SQ’s US$1.9b in current liabilities, the company has been able to meet these commitments with a current assets level of US$2.9b, leading to a 1.54x current account ratio. For IT companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SQ service its debt comfortably?
With debt reaching 91% of equity, SQ may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since SQ is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
At its current level of cash flow coverage, SQ has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for SQ’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Square to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SQ’s future growth? Take a look at our free research report of analyst consensus for SQ’s outlook.
- Valuation: What is SQ 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 SQ 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.