Mary Ramos
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Lululemon Athletica Inc. (NASDAQ:LULU), a large-cap worth US$21b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Using the most recent data for LULU, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Check out our latest analysis for Lululemon Athletica
Does LULU face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. For Lululemon Athletica, investors should not worry about its debt levels because the company has none! This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors’ risk associated with debt is virtually non-existent with LULU, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can LULU meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Lululemon Athletica has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at LULU’s US$444m in current liabilities, the company has been able to meet these commitments with a current assets level of US$1.4b, leading to a 3.07x current account ratio. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
LULU has no debt as well as ample cash to cover its near-term liabilities. Its strong balance sheet reduces risk for the company and shareholders. Keep in mind I haven’t considered other factors such as how LULU has performed in the past. I recommend you continue to research Lululemon Athletica to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LULU’s future growth? Take a look at our free research report of analyst consensus for LULU’s outlook.
Valuation: What is LULU 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 LULU is currently mispriced by the market.
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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
