There are a number of reasons that attract investors towards large-cap companies such as The Gap Inc (NYSE:GPS), with a market cap of US$11.84B. 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 their continued success lies in its financial health. I will provide an overview of Gap’s financial liquidity and leverage to give you an idea of Gap’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 GPS here. See our latest analysis for Gap

Does GPS produce enough cash relative to debt?

GPS has sustained its debt level by about US$1.25B over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, GPS currently has US$1.78B remaining in cash and short-term investments , ready to deploy into the business. Moreover, GPS has generated cash from operations of US$1.38B over the same time period, leading to an operating cash to total debt ratio of 110.49%, signalling that GPS’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In GPS’s case, it is able to generate 1.1x cash from its debt capital.

Can GPS meet its short-term obligations with the cash in hand?

Looking at GPS’s most recent US$2.46B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$4.57B, with a current ratio of 1.86x. Generally, for Specialty Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can GPS service its debt comfortably?

With a debt-to-equity ratio of 39.73%, GPS’s debt level may be seen as prudent. This range is considered safe as GPS is not taking on too much debt obligation, which may be constraining for future growth. We can test if GPS’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For GPS, the ratio of 26.22x suggests that interest is amply covered. Large-cap investments like GPS are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

GPS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how GPS has been performing in the past. I recommend you continue to research Gap to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GPS’s future growth? Take a look at our free research report of analyst consensus for GPS’s outlook.

2. Valuation: What is GPS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GPS is currently mispriced by the market.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.