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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Western Digital Corporation (NASDAQ:WDC) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, its financial health remains the key to continued success. Let’s take a look at Western Digital’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WDC here. View our latest analysis for Western Digital
How much cash does WDC generate through its operations?
WDC’s debt levels have fallen from US$16.99B to US$13.15B over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, WDC currently has US$6.38B remaining in cash and short-term investments , ready to deploy into the business. On top of this, WDC has generated US$3.44B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26.13%, indicating that WDC’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WDC’s case, it is able to generate 0.26x cash from its debt capital.
Does WDC’s liquid assets cover its short-term commitments?
With current liabilities at US$4.34B, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.55x. For Tech companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can WDC service its debt comfortably?
With a debt-to-equity ratio of 99.12%, WDC 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. The sustainability of WDC’s debt levels can be assessed by comparing the company’s interest payments to earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For WDC, the ratio of 5.15x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes WDC and other large-cap investments thought to be safe.