What does Capri Holdings Limited's (NYSE:CPRI) Balance Sheet Tell Us About Its Future?

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Capri Holdings Limited (NYSE:CPRI), with a market cap of US$5.2b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at CPRI’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 CPRI here.

View our latest analysis for Capri Holdings

Does CPRI Produce Much Cash Relative To Its Debt?

Over the past year, CPRI has ramped up its debt from US$875m to US$2.6b , which includes long-term debt. With this increase in debt, CPRI currently has US$172m remaining in cash and short-term investments to keep the business going. Moreover, CPRI has generated US$694m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 27%, signalling that CPRI’s operating cash is sufficient to cover its debt.

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

With current liabilities at US$1.5b, it appears that the company has been able to meet these commitments with a current assets level of US$1.7b, leading to a 1.12x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Luxury 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.

NYSE:CPRI Historical Debt, June 27th 2019
NYSE:CPRI Historical Debt, June 27th 2019

Is CPRI’s debt level acceptable?

CPRI is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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. In CPRI's case, the ratio of 23.16x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

CPRI’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CPRI's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CPRI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Capri Holdings to get a more holistic view of the mid-cap by looking at:

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

  2. Valuation: What is CPRI 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 CPRI 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.