There are a number of reasons that attract investors towards large-cap companies such as Wesfarmers Limited (ASX:WES), with a market cap of A$50.52B. 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. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Wesfarmers’s financial liquidity and leverage to give you an idea of Wesfarmers’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into WES here. See our latest analysis for Wesfarmers
How does WES’s operating cash flow stack up against its debt?
WES has shrunken its total debt levels in the last twelve months, from A$7,303.0M to A$5,413.0M , which is made up of current and long term debt. With this debt repayment, WES’s cash and short-term investments stands at A$1,013.0M for investing into the business. Additionally, WES has produced cash from operations of A$4,226.0M in the last twelve months, resulting in an operating cash to total debt ratio of 78.07%, signalling that WES’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WES’s case, it is able to generate 0.78x cash from its debt capital.
Can WES meet its short-term obligations with the cash in hand?
Looking at WES’s most recent A$10,417.0M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of A$9,667.0M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Does WES face the risk of succumbing to its debt-load?
WES’s level of debt is appropriate relative to its total equity, at 22.61%. This range is considered safe as WES is not taking on too much debt obligation, which may be constraining for future growth. We can test if WES’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In WES’s case, the ratio of 18.34x suggests that interest is comfortably covered. Large-cap investments like WES are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.