How Financially Strong Is Reece Limited (ASX:REH)?

Simply Wall St

Thu, Jun 27, 2019, 10:15 PM

Mid-caps stocks, like Reece Limited (ASX:REH) with a market capitalization of AU$5.4b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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 REH’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 Reece’s financial health, so you should conduct further analysis into REH here.

Check out our latest analysis for Reece

Does REH Produce Much Cash Relative To Its Debt?

REH has built up its total debt levels in the last twelve months, from AU$100m to AU$1.7b , which accounts for long term debt. With this growth in debt, REH's cash and short-term investments stands at AU$99m , ready to be used for running the business. Additionally, REH has generated AU$139m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 8.2%, meaning that REH’s operating cash is less than its debt.

Can REH pay its short-term liabilities?

Looking at REH’s AU$807m in current liabilities, the company has been able to meet these obligations given the level of current assets of AU$1.9b, with a current ratio of 2.31x. The current ratio is the number you get when you divide current assets by current liabilities. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is REH’s debt level acceptable?

REH is a relatively highly levered company with a debt-to-equity of 86%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In REH's case, the ratio of 8.86x suggests that interest is appropriately 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.