Investors looking for stocks with high market liquidity and zero debt on the balance sheet should consider Persimmon Plc (LON:PSN). With a market valuation of UK£7.4b, PSN is a safe haven in times of market uncertainty due to its strong balance sheet. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for PSN, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Is PSN’s debt level acceptable?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For PSN, the debt-to-equity ratio is zero, meaning that the company has no debt. 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 PSN, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does PSN’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Persimmon has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of UK£1.1b, it seems that the business has been able to meet these obligations given the level of current assets of UK£4.2b, with a current ratio of 3.75x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
PSN has zero debt as well as ample cash to cover its near-term liabilities. Its strong balance sheet reduces risk for the company and its investors. I admit this is a fairly basic analysis for PSN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Persimmon to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PSN’s future growth? Take a look at our free research report of analyst consensus for PSN’s outlook.
- Valuation: What is PSN 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 PSN 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.
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