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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Keppel Corporation Limited (SGX:BN4), with a market cap of S$11b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at BN4’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 BN4 here.
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How does BN4’s operating cash flow stack up against its debt?
BN4 has shrunken its total debt levels in the last twelve months, from S$8.6b to S$6.9b – this includes long-term debt. With this debt payback, BN4 currently has S$2.2b remaining in cash and short-term investments , ready to deploy into the business. Additionally, BN4 has produced cash from operations of S$731m in the last twelve months, leading to an operating cash to total debt ratio of 11%, indicating that BN4’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BN4’s case, it is able to generate 0.11x cash from its debt capital.
Can BN4 pay its short-term liabilities?
At the current liabilities level of S$7.2b, it seems that the business has been able to meet these obligations given the level of current assets of S$14b, with a current ratio of 1.91x. Generally, for Industrials companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can BN4 service its debt comfortably?
BN4 is a relatively highly levered company with a debt-to-equity of 58%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if BN4’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 BN4, the ratio of 54.55x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BN4 ample headroom to grow its debt facilities.
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BN4’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 BN4’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 BN4 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Keppel to get a more holistic view of the mid-cap by looking at: