Are The Weir Group PLC’s (LON:WEIR) Interest Costs Too High?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as The Weir Group PLC (LON:WEIR), with a market capitalization of UK£4.0b, 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. WEIR’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. Don’t forget that this is a general and concentrated examination of Weir Group’s financial health, so you should conduct further analysis into WEIR here.

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WEIR’s Debt (And Cash Flows)

Over the past year, WEIR has ramped up its debt from UK£1.1b to UK£1.4b , which includes long-term debt. With this growth in debt, WEIR currently has UK£263m remaining in cash and short-term investments , ready to be used for running the business. Moreover, WEIR has produced UK£218m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16%, signalling that WEIR’s debt is not covered by operating cash.

Can WEIR pay its short-term liabilities?

At the current liabilities level of UK£1.5b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. The current ratio is the number you get when you divide current assets by current liabilities. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

LSE:WEIR Historical Debt, May 16th 2019
LSE:WEIR Historical Debt, May 16th 2019

Can WEIR service its debt comfortably?

With a debt-to-equity ratio of 65%, WEIR can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if WEIR’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 WEIR, the ratio of 8.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WEIR ample headroom to grow its debt facilities.

Next Steps:

Although WEIR’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. Since there is also no concerns around WEIR’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how WEIR has been performing in the past. I suggest you continue to research Weir Group to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for WEIR’s future growth? Take a look at our free research report of analyst consensus for WEIR’s outlook.
  2. Valuation: What is WEIR 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 WEIR is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.