Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Smiths Group plc ( LON:SMIN ), with a market capitalization of UK£5.7b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at SMIN’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Smiths Group’s financial health, so you should conduct further analysis into SMIN here .
Does SMIN Produce Much Cash Relative To Its Debt?
Over the past year, SMIN has reduced its debt from UK£1.7b to UK£1.6b , which also accounts for long term debt. With this debt repayment, SMIN’s cash and short-term investments stands at UK£717m , ready to be used for running the business. Moreover, SMIN has produced cash from operations of UK£405m in the last twelve months, resulting in an operating cash to total debt ratio of 25%, meaning that SMIN’s debt is appropriately covered by operating cash.
Does SMIN’s liquid assets cover its short-term commitments?
Looking at SMIN’s UK£961m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.04x. The current ratio is calculated by dividing current assets by current liabilities. For Industrials companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SMIN’s debt level acceptable?
With debt reaching 70% of equity, SMIN may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SMIN’s case, the ratio of 9.02x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SMIN’s high interest coverage is seen as responsible and safe practice.
Although SMIN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SMIN has been performing in the past. I recommend you continue to research Smiths Group to get a better picture of the mid-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for SMIN’s future growth? Take a look at our free research report of analyst consensus for SMIN’s outlook.
- Valuation : What is SMIN 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 SMIN 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 .
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.