Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as LendLease Group (ASX:LLC) with a market capitalization of AUD $9.72B, rarely draw their attention from analysts and investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. I recommend you look at the following hurdles to assess LLC’s financial health. See our latest analysis for LLC
Can LLC service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For LLC, the debt-to-equity ratio is 35.06%, which means its risk of facing a debt-overhang is very low. While debt-to-equity ratio has several factors at play, an easier way to check whether LLC’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. LLC’s interest on debt is sufficiently covered by earnings as it sits at around 10x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does LLC’s liquid assets cover its short-term commitments?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. We need to assess LLC’s cash and other liquid assets against its upcoming expenses. Our analysis shows that LLC is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? Although LLC’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. As such, investors should ask themselves if they believe LLC still has room for improvement in terms of its operating efficiency. Since LLC’s capital structure could change over time, I encourage researching market expectations for LLC’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. LLC’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.