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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Peab AB (publ) (STO:PEAB B), with a market capitalization of kr23b, 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. Today we will look at PEAB B’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PEAB B here.
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PEAB B’s Debt (And Cash Flows)
PEAB B has built up its total debt levels in the last twelve months, from kr4.0b to kr7.2b – this includes long-term debt. With this increase in debt, PEAB B currently has kr1.2b remaining in cash and short-term investments to keep the business going. On top of this, PEAB B has generated kr638m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 8.8%, meaning that PEAB B’s debt is not covered by operating cash.
Can PEAB B pay its short-term liabilities?
At the current liabilities level of kr18b, the company has been able to meet these obligations given the level of current assets of kr25b, with a current ratio of 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can PEAB B service its debt comfortably?
PEAB B is a relatively highly levered company with a debt-to-equity of 55%. 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 PEAB B’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 PEAB B, the ratio of 108x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PEAB B ample headroom to grow its debt facilities.
Next Steps:
PEAB B’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 PEAB B's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for PEAB B's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Peab to get a more holistic view of the mid-cap by looking at: