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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as FedEx Corporation (NYSE:FDX) a safer option. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the health of the financials determines whether the company continues to succeed. This article will examine FedEx’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FDX here.
FDX’s Debt (And Cash Flows)
FDX has sustained its debt level by about US$18b over the last 12 months – this includes long-term debt. At this stable level of debt, FDX’s cash and short-term investments stands at US$2.9b , ready to be used for running the business. Additionally, FDX has generated cash from operations of US$6.8b over the same time period, resulting in an operating cash to total debt ratio of 37%, meaning that FDX’s current level of operating cash is high enough to cover debt.
Does FDX’s liquid assets cover its short-term commitments?
Looking at FDX’s US$9.3b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$14b, leading to a 1.46x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Logistics companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FDX service its debt comfortably?
With a debt-to-equity ratio of 93%, FDX can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FDX, the ratio of 10.18x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes FDX and other large-cap investments thought to be safe.
Although FDX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for FDX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research FedEx to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FDX’s future growth? Take a look at our free research report of analyst consensus for FDX’s outlook.
- Valuation: What is FDX 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 FDX 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.