Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as SEEK Limited (ASX:SEK) with a market-capitalization of AU$6.5b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. SEK’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SEK here.
Does SEK Produce Much Cash Relative To Its Debt?
SEK has built up its total debt levels in the last twelve months, from AU$1.0b to AU$1.5b , which accounts for long term debt. With this rise in debt, SEK’s cash and short-term investments stands at AU$370m to keep the business going. On top of this, SEK has generated AU$395m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 27%, meaning that SEK’s debt is appropriately covered by operating cash.
Can SEK meet its short-term obligations with the cash in hand?
Looking at SEK’s AU$842m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of AU$651m, leading to a current ratio of 0.77x. The current ratio is the number you get when you divide current assets by current liabilities.
Can SEK service its debt comfortably?
SEK is a relatively highly levered company with a debt-to-equity of 88%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SEK 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 SEK’s, case, the ratio of 7.59x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SEK ample headroom to grow its debt facilities.
SEK’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how SEK has been performing in the past. You should continue to research SEEK to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SEK’s future growth? Take a look at our free research report of analyst consensus for SEK’s outlook.
- Valuation: What is SEK 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 SEK 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 firstname.lastname@example.org. 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.