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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Lechwerke AG (FRA:LEC), with a market capitalization of €3.5b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. LEC’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into LEC here.
Can LEC service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For LEC, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with LEC, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can LEC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Lechwerke 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. With current liabilities at €1.3b, the company may not have an easy time meeting these commitments with a current assets level of €127m, leading to a current ratio of 0.1x. The current ratio is the number you get when you divide current assets by current liabilities.
Though LEC has no debt on its balance sheet, it still has short term liabilities such as salaries to pay. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, especially when liquidity may also be an issue. This is only a rough assessment of financial health, and I’m sure LEC has company-specific issues impacting its capital structure decisions. You should continue to research Lechwerke to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LEC’s future growth? Take a look at our free research report of analyst consensus for LEC’s outlook.
- Historical Performance: What has LEC’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.