In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Tesco PLC (LON:TSCO), a large-cap worth UK£22b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Tesco’s financial liquidity and leverage to give you an idea of Tesco’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TSCO here.
Check out our latest analysis for Tesco
Does TSCO Produce Much Cash Relative To Its Debt?
TSCO has shrunk its total debt levels in the last twelve months, from UK£8.6b to UK£7.3b – this includes long-term debt. With this reduction in debt, TSCO currently has UK£2.3b remaining in cash and short-term investments to keep the business going. Additionally, TSCO has produced UK£2.0b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 27%, signalling that TSCO’s operating cash is sufficient to cover its debt.
Does TSCO’s liquid assets cover its short-term commitments?
With current liabilities at UK£21b, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£13b, leading to a current ratio of 0.61x. The current ratio is calculated by dividing current assets by current liabilities.
Does TSCO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 49%, TSCO can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because 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. We can assess the sustainability of TSCO’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For TSCO, the ratio of 7.73x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as TSCO is a safe investment.