Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Reliance Worldwide Corporation Limited (ASX:RWC), with a market cap of AU$3.4b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at RWC’s debt concentration and assess their financial liquidity 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 RWC here.
Does RWC Produce Much Cash Relative To Its Debt?
RWC has built up its total debt levels in the last twelve months, from AU$268m to AU$502m – this includes long-term debt. With this growth in debt, RWC currently has AU$72m remaining in cash and short-term investments , ready to be used for running the business. Moreover, RWC has generated AU$93m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 18%, indicating that RWC’s current level of operating cash is not high enough to cover debt.
Can RWC pay its short-term liabilities?
With current liabilities at AU$150m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.57x. The current ratio is calculated by dividing current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can RWC service its debt comfortably?
RWC’s level of debt is appropriate relative to its total equity, at 37%. This range is considered safe as RWC is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether RWC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RWC’s, case, the ratio of 8.55x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RWC ample headroom to grow its debt facilities.
RWC’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how RWC has been performing in the past. You should continue to research Reliance Worldwide to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RWC’s future growth? Take a look at our free research report of analyst consensus for RWC’s outlook.
- Valuation: What is RWC 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 RWC 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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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.