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Mid-caps stocks, like Travis Perkins plc (LON:TPK) with a market capitalization of UK£2.80b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine TPK’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 TPK here.
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How does TPK’s operating cash flow stack up against its debt?
TPK’s debt level has been constant at around UK£612.3m over the previous year – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£151.5m for investing into the business. Additionally, TPK has produced UK£218.8m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 35.7%, signalling that TPK’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In TPK’s case, it is able to generate 0.36x cash from its debt capital.
Can TPK meet its short-term obligations with the cash in hand?
With current liabilities at UK£1.65b, it appears that the company has been able to meet these commitments with a current assets level of UK£2.23b, leading to a 1.36x current account ratio. Generally, for Trade Distributors 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 TPK service its debt comfortably?
With debt at 23.0% of equity, TPK may be thought of as appropriately levered. TPK is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for TPK, and the company also has the ability and headroom to increase debt if needed going forward.
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TPK’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how TPK has been performing in the past. You should continue to research Travis Perkins to get a more holistic view of the stock by looking at: