Mid-caps stocks, like John Wood Group PLC (LON:WG.) with a market capitalization of UK£4.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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. WG.’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 WG. here.
How does WG.’s operating cash flow stack up against its debt?
WG.’s debt levels surged from US$999m to US$3.3b over the last 12 months , which accounts for long term debt. With this growth in debt, WG.’s cash and short-term investments stands at US$1.7b , ready to deploy into the business. On top of this, WG. has produced cash from operations of US$415m during the same period of time, resulting in an operating cash to total debt ratio of 13%, signalling that WG.’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In WG.’s case, it is able to generate 0.13x cash from its debt capital.
Does WG.’s liquid assets cover its short-term commitments?
Looking at WG.’s US$4.3b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$4.7b, leading to a 1.08x current account ratio. Generally, for Energy Services companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WG.’s debt level acceptable?
With debt reaching 68% of equity, WG. may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. However, since WG. is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
WG.’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. Since there is also no concerns around WG.’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure WG. has company-specific issues impacting its capital structure decisions. I recommend you continue to research John Wood Group to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WG.’s future growth? Take a look at our free research report of analyst consensus for WG.’s outlook.
- Valuation: What is WG. 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 WG. 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 email@example.com.