Over the past few weeks I have been watching the developments of the retail industry. One company I think is very interesting to analyze is TJX Companies (NYSE:TJX). This off-price retailer of brand-name apparel and home-fashion is the largest of its kind in the U.S. market. Operating under the T.J. Maxx, Marshalls, HomeGoods, and Sierra Trading Post brands in the domestic market, this firm operates over 2,400 stores, and another 700 stores in Canada and Europe. However, this company's popularity, as well as its profitability, is due to the massive 20%-60% discounts attributed to its products. In fact, with only 9.8% cost of capital, the ten year average ROIC levels of 20% are more than attractive for investors.
Moreover, TJX's benefit of scale, with 16,000 vendors across the globe and 20 automated distribution centers, has driven sales growth in the past few years, granting the firm a narrow moat rating. In addition to this, the off-price bargaining model has earned the company strong bargaining power with suppliers, in addition to a wide and loyal customer base.
While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company, by analyzing TJX's debt ratios and what analysts and other top investors have to say about this company's future. From this analysis we should get an idea if the company is highly leveraged and how much to expect in return for a long term investment. It is essential to remark that gaining knowledge about TJX's debt and liabilities is a key component in understanding the risk of investing in this company.
Total Debt to Total Assets Ratio
This metric is used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. If the ratio is above 1, it means that a company's total debt surpasses the value of its total assets. To the contrary, the company's assets will be worth more than its total debt. The total debt to total assets ratio (especially when complemented with other measures of financial health) can come in extremely handy when investors want to determine a company's level of risk.
TJX's total debt to total assets ratio has been shrinking over the past three years, declining from 0.10 to 0.07. This means that, since 2010, the company has increased the value of its assets at a faster pace than its debt grew, demonstrating management's commitment with reducing debt levels. Furthermore, as the ratio is currently well below 1x (0.07), TJX faces low financial risk, given the volume of its assets.
Debt ratio = Total Liabilities / Total Assets
The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity, and vice versa, the company's assets are financed through debt. A company with a high debt ratio - or that is "highly leveraged" - could be in danger if creditors start to demand repayment of debt.
Over the past three years, TJX's total liabilities to total assets ratio has grown only very slightly, from 0.60 to 0.61. However, given that the 2013 TTM ratio surpasses the 0.50 mark, we can assume that most of the firm's assets are financed through debt. As the figure grows, the risk of investing in this firm accompanies.
Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company, versus what the shareholders have committed. A high ratio generally means that a company has been aggressive in financing its growth with debt, resulting in volatile earnings. A high debt-to-equity ratio also indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
Compared with 2011, TJX's debt-to-equity ratio has increased, from 1.56 to 1.59 (in 2013). I always prefer companies with a very low or minimal debt-to-equity ratio, because it's basically a sign of a conservative balance sheet. The company's ratio of 1.59 -which surpasses 1x- implies that the company faces high risks, and so do its investors, which is worrisome. When analyzed, this figure entails that shareholders have invested more than suppliers, lenders, creditors and obligators.
Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells investors the extent to which the company is using its equity to support operations and growth. Companies with a high capitalization ratio are considered to be risky because failure to repay their debt on time can lead to insolvency gets, making it difficult to get more loans in the future.
Over the past three years, TJX's capitalization ratio has decreased from 0.20 to 0.17, implying that the company has more equity compared to its long-term debt, allowing for support of its operations and growth. A decreasing ratio -currently at 0.17- implies a slight reduction in the company's financial risk (which is, actually, quite low).
Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. It provides an indication of a firm's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company is able to carry its total debt, and thus will successfully weather rough economic conditions.
Moreover, the ratio currently stands above 1x, which implies that the company has the ability to cover its total debt with its yearly cash flow from operations. This is generally a positive sign to look for when investing.
I also want to know which hedge funds bought the stock in the recent quarters, in order to determine if investors have faith in the company's future. In TJX's case, both investment gurus Joel Greenblatt and Ken Fisher bought the company's stock this past quarter, at an average price of $59.33.
Furthermore, several analysts expect TJX to perform well over the upcoming years. Analysts at Yahoo! Finance are estimating a growing EPS of $3.19 for the current fiscal year and an EPS of $3.60 for the next fiscal year. Bloomberg projects that revenue will jump from a current $29.28B to $31.32B during the next fiscal year.
Nothing to worry about
The bottom line is, that despite some minor issues, TJX is a very solid long term investment. Not only is its large scale and discount model highly profitable to the company, but also to shareholders, considering the double digit ROIC levels, and 52% returns on equity. Moreover, with revenue currently growing at 13.4% and EBITDA growth even higher, at 19.4%, I feel very bullish about this retailer's business model. I also believe that the stock's current trading price of 20.9x trailing earnings relative to the industry average of 18.5x is more than fair, given the advantages shareholders can obtain in the long run from this investment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.