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Mid-caps stocks, like Intertek Group plc (LON:ITRK) with a market capitalization of UK£7.5b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine ITRK’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 ITRK here.
See our latest analysis for Intertek Group
ITRK’s Debt (And Cash Flows)
ITRK’s debt levels surged from UK£681m to UK£985m over the last 12 months – this includes long-term debt. With this rise in debt, ITRK’s cash and short-term investments stands at UK£207m to keep the business going. Moreover, ITRK has produced UK£459m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 47%, signalling that ITRK’s current level of operating cash is high enough to cover debt.
Does ITRK’s liquid assets cover its short-term commitments?
Looking at ITRK’s UK£743m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£929m, with a current ratio of 1.25x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can ITRK service its debt comfortably?
With total debt exceeding equity, ITRK is considered a highly levered company. 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 ITRK’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 ITRK, the ratio of 18.07x suggests that interest is comfortably 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.
Next Steps:
Although ITRK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure ITRK has company-specific issues impacting its capital structure decisions. I suggest you continue to research Intertek Group to get a more holistic view of the mid-cap by looking at: