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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as The Weir Group PLC (LON:WEIR), with a market cap of UK£4.0b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at WEIR’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 WEIR here.
Does WEIR produce enough cash relative to debt?
WEIR has built up its total debt levels in the last twelve months, from UK£1.1b to UK£1.2b , which accounts for long term debt. With this rise in debt, WEIR’s cash and short-term investments stands at UK£641m for investing into the business. Moreover, WEIR has generated UK£177m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 15%, indicating that WEIR’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WEIR’s case, it is able to generate 0.15x cash from its debt capital.
Can WEIR pay its short-term liabilities?
With current liabilities at UK£1.3b, it appears that the company has been able to meet these obligations given the level of current assets of UK£2.2b, with a current ratio of 1.66x. Usually, for Machinery companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is WEIR’s debt level acceptable?
WEIR is a relatively highly levered company with a debt-to-equity of 64%. 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 8.06x 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.
WEIR’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for WEIR’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Weir Group to get a more holistic view of the mid-cap by looking at:
- 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.
- 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.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.