Stocks with market capitalization between $2B and $10B, such as Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) with a size of NZ$7.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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. Let’s take a look at FPH’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into FPH here.
How much cash does FPH generate through its operations?
FPH’s debt levels surged from NZ$86m to NZ$96m over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$111m , ready to deploy into the business. On top of this, FPH has produced NZ$259m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 270%, signalling that FPH’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FPH’s case, it is able to generate 2.7x cash from its debt capital.
Can FPH pay its short-term liabilities?
At the current liabilities level of NZ$196m, it appears that the company has been able to meet these obligations given the level of current assets of NZ$406m, with a current ratio of 2.08x. Usually, for Medical Equipment companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is FPH’s debt level acceptable?
With debt at 12% of equity, FPH may be thought of as appropriately levered. FPH is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether FPH is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In FPH’s, case, the ratio of 420x 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.
FPH has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how FPH has been performing in the past. I suggest you continue to research Fisher & Paykel Healthcare to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FPH’s future growth? Take a look at our free research report of analyst consensus for FPH’s outlook.
- Valuation: What is FPH 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 FPH 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.