There are a number of reasons that attract investors towards large-cap companies such as eBay Inc (NASDAQ:EBAY), with a market cap of USD $41.57B. One such reason is its ‘too big to fail’ aura which gives it the appearance of a strong and healthy investment. However, investors may not be aware of the metrics used to measure financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. See our latest analysis for EBAY
Can EBAY service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. EBAY’s debt-to-equity ratio stands at 99.93%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether EBAY’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. EBAY’s profits amply covers interest at 20.99 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as EBAY’s high interest coverage is seen as responsible and safe practice.
Does EBAY generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This also assesses EBAY’s debt repayment capacity, which is not a big concern for a large company. Last year, EBAY’s operating cash flow was 0.24x its current debt. A ratio of over 0.1x shows that EBAY is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
EBAY’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. Although operating cash flow may not be its strength, relative to debt levels, eBay is a large-cap stock which may offer other attractive fundamentals. Now that you know to keep debt in mind when putting together your investment thesis, I recommend you check out our latest free analysis report on eBay to see what other factors for EBAY you should consider.
PS. If you are not interested in eBay anymore, you can use our free platform to see my list of over 150 other stocks with a high growth potential.
Investors! Do you know the famous “Icahn’s lift”?
Noted activist shareholder, Carl Ichan has become famous (and rich) by taking positions in badly run public corporations and forcing them to make radical changes to uncover shareholders value. “Icahn lift” is a bump in a company’s stock price that often occurs after he has taken a position in it. What were his last buys? Click here to view a FREE detailed infographic analysis of Carl Icahn’s investment portfolio.