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Mid-caps stocks, like LendLease Group (ASX:LLC) with a market capitalization of AU$7.9b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine LLC’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into LLC here.
How does LLC’s operating cash flow stack up against its debt?
LLC’s debt levels surged from AU$2.2b to AU$2.4b over the last 12 months – this includes long-term debt. With this increase in debt, LLC currently has AU$1.2b remaining in cash and short-term investments , ready to deploy into the business. On top of this, LLC has generated cash from operations of AU$73m during the same period of time, leading to an operating cash to total debt ratio of 3.1%, indicating that LLC’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LLC’s case, it is able to generate 0.031x cash from its debt capital.
Can LLC meet its short-term obligations with the cash in hand?
Looking at LLC’s AU$6.6b in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of AU$6.3b, leading to a current ratio of 0.96x.
Is LLC’s debt level acceptable?
With debt at 37% of equity, LLC may be thought of as appropriately levered. LLC is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if LLC’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LLC, the ratio of 8.31x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although LLC’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure LLC has company-specific issues impacting its capital structure decisions. You should continue to research LendLease Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LLC’s future growth? Take a look at our free research report of analyst consensus for LLC’s outlook.
- Valuation: What is LLC 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 LLC 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.