Mid-caps stocks, like Sonic Healthcare Limited (ASX:SHL) with a market capitalization of AU$10.15B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine SHL’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SHL here. Check out our latest analysis for Sonic Healthcare

Does SHL generate an acceptable amount of cash through operations?

SHL has built up its total debt levels in the last twelve months, from AU$2.58B to AU$2.87B , which is made up of current and long term debt. With this growth in debt, SHL currently has AU$437.62M remaining in cash and short-term investments for investing into the business. On top of this, SHL has produced cash from operations of AU$736.37M during the same period of time, leading to an operating cash to total debt ratio of 25.63%, indicating that SHL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SHL’s case, it is able to generate 0.26x cash from its debt capital.

Can SHL pay its short-term liabilities?

At the current liabilities level of AU$1.61B liabilities, it seems that the business has not been able to meet these commitments with a current assets level of AU$1.30B, leading to a 0.81x current account ratio. which is under the appropriate industry ratio of 3x.

Does SHL face the risk of succumbing to its debt-load?

With debt reaching 70.22% of equity, SHL may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 SHL’s case, the ratio of 9.16x 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.