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The Weir Group PLC (LON:WEIR) is a small-cap stock with a market capitalization of UK£3.8b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into WEIR here.
Does WEIR Produce Much Cash Relative To Its Debt?
WEIR’s debt levels surged from UK£1.1b to UK£1.4b over the last 12 months , which accounts for long term debt. With this rise in debt, WEIR currently has UK£263m remaining in cash and short-term investments to keep the business going. Additionally, WEIR has produced UK£218m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16%, indicating that WEIR’s debt is not covered by operating cash.
Does WEIR’s liquid assets cover its short-term commitments?
With current liabilities at UK£1.5b, the company has been able to meet these obligations given the level of current assets of UK£2.0b, with a current ratio of 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.
Does WEIR face the risk of succumbing to its debt-load?
With debt reaching 65% of equity, WEIR may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In WEIR’s case, the ratio of 8.57x 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 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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure WEIR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Weir Group to get a more holistic view of the small-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.
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.