Is Bellway p.l.c.’s (LON:BWY) Liquidity Good Enough?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Bellway p.l.c. (LON:BWY), with a market cap of UK£3.9b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine BWY’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. Don’t forget that this is a general and concentrated examination of Bellway’s financial health, so you should conduct further analysis into BWY here.

See our latest analysis for Bellway

BWY’s Debt (And Cash Flows)

BWY’s debt levels have fallen from UK£168m to UK£60m over the last 12 months . With this debt repayment, BWY currently has UK£33m remaining in cash and short-term investments to keep the business going. Moreover, BWY has produced cash from operations of UK£288m in the last twelve months, leading to an operating cash to total debt ratio of 479%, indicating that BWY’s debt is appropriately covered by operating cash.

Can BWY meet its short-term obligations with the cash in hand?

At the current liabilities level of UK£848m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.21x. The current ratio is the number you get when you divide current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

LSE:BWY Historical Debt, April 7th 2019
LSE:BWY Historical Debt, April 7th 2019

Is BWY’s debt level acceptable?

BWY’s level of debt is low relative to its total equity, at 2.2%. BWY is not taking on too much debt commitment, which may be constraining for future growth. We can test if BWY’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 BWY, the ratio of 46.42x suggests that interest is comfortably 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.

Next Steps:

BWY has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for BWY’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Bellway to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for BWY’s future growth? Take a look at our free research report of analyst consensus for BWY’s outlook.
  2. Valuation: What is BWY 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 BWY 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.