Investors pursuing a solid, dependable stock investment can often be led to The Sherwin-Williams Company (NYSE:SHW), a large-cap worth US$37.00b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Sherwin-Williams’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SHW here. See our latest analysis for Sherwin-Williams

How much cash does SHW generate through its operations?

SHW has built up its total debt levels in the last twelve months, from US$1.95b to US$0 , which comprises of short- and long-term debt. With this increase in debt, SHW currently has US$204.21m remaining in cash and short-term investments for investing into the business. On top of this, SHW has produced US$1.88b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 17.91%, signalling that SHW’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SHW’s case, it is able to generate 0.18x cash from its debt capital.

Does SHW’s liquid assets cover its short-term commitments?

At the current liabilities level of US$3.99b liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$4.47b, leading to a 1.12x current account ratio. For Chemicals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does SHW face the risk of succumbing to its debt-load?

Since equity is smaller than total debt levels, Sherwin-Williams is considered to have high leverage. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In SHW’s case, the ratio of 7.06x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes SHW and other large-cap investments thought to be safe.

Next Steps:

SHW’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure SHW has company-specific issues impacting its capital structure decisions. You should continue to research Sherwin-Williams to get a more holistic view of the stock by looking at:

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

2. Valuation: What is SHW 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 SHW 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.