Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Franklin Electric Co., Inc. (NASDAQ:FELE), with a market capitalization of US$2.1b, rarely draw their attention from the investing community. 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 FELE’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FELE here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does FELE Produce Much Cash Relative To Its Debt?
Over the past year, FELE has reduced its debt from US$278m to US$251m , which includes long-term debt. With this debt payback, FELE’s cash and short-term investments stands at US$54m , ready to be used for running the business. Moreover, FELE has generated US$153m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 61%, signalling that FELE’s operating cash is sufficient to cover its debt.
Does FELE’s liquid assets cover its short-term commitments?
Looking at FELE’s US$284m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$606m, leading to a 2.13x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FELE service its debt comfortably?
With debt at 34% of equity, FELE may be thought of as appropriately levered. This range is considered safe as FELE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if FELE’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 FELE, the ratio of 13.38x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FELE ample headroom to grow its debt facilities.
FELE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure FELE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Franklin Electric to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FELE’s future growth? Take a look at our free research report of analyst consensus for FELE’s outlook.
- Valuation: What is FELE 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 FELE 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 firstname.lastname@example.org. 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.