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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Sembcorp Industries Ltd (SGX:U96), with a market capitalization of S$4.88b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at U96’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 U96 here.
See our latest analysis for Sembcorp Industries
Does U96 produce enough cash relative to debt?
U96 has sustained its debt level by about S$9.92b over the last 12 months – this includes both the current and long-term debt. At this current level of debt, U96’s cash and short-term investments stands at S$1.75b , ready to deploy into the business. Additionally, U96 has generated S$921.0m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 9.3%, signalling that U96’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In U96’s case, it is able to generate 0.093x cash from its debt capital.
Does U96’s liquid assets cover its short-term commitments?
With current liabilities at S$5.74b, it seems that the business has been able to meet these obligations given the level of current assets of S$6.33b, with a current ratio of 1.1x. Generally, for Industrials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is U96’s debt level acceptable?
U96 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether U96 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 U96’s, case, the ratio of 1.27x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
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At its current level of cash flow coverage, U96 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure U96 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sembcorp Industries to get a better picture of the stock by looking at: