A market capitalization of USD $11.62B puts Tiffany & Co (NYSE:TIF) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for Tiffany
Does TIF face the risk of succumbing to its debt-load?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. In the case of TIF, the debt-to-equity ratio is 35.34%, which means the risk of facing a debt-overhang is very low. 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. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. TIF’s profits amply covers interest at 16.9 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as TIF’s high interest coverage is seen as responsible and safe practice.
Does TIF generate an acceptable amount of cash through operations?
A basic way to evaluate TIF’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This is also a test for whether TIF has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of TIF, operating cash flow turned out to be 0.7x its debt level over the past twelve months. A ratio of over 0.5x is a positive sign and shows that TIF is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? TIF has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Since TIF’s financial situation could change over time, I encourage researching market expectations for TIF’s future growth on our free analysis platform.