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Investors pursuing a solid, dependable stock investment can often be led to Macy’s Inc (NYSE:M), a large-cap worth US$12.27B. 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 key to extending previous success is in the health of the company’s financials. Today we will look at Macy’s’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into M here. Check out our latest analysis for Macy’s
Does M produce enough cash relative to debt?
M’s debt levels have fallen from US$7.05B to US$6.07B over the last 12 months , which is made up of current and long term debt. With this debt payback, M’s cash and short-term investments stands at US$1.46B , ready to deploy into the business. On top of this, M has generated US$1.94B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 32.02%, signalling that M’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In M’s case, it is able to generate 0.32x cash from its debt capital.
Can M pay its short-term liabilities?
With current liabilities at US$5.08B, the company has been able to meet these commitments with a current assets level of US$7.44B, leading to a 1.47x current account ratio. For Multiline Retail companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does M face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Macy’s is considered to have high leverage. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For M, the ratio of 5.55x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as M is a safe investment.