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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as The Weir Group PLC (LON:WEIR) with a market-capitalization of UK£4.28b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at WEIR’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into WEIR here.
See our latest analysis for Weir Group
How much cash does WEIR generate through its operations?
Over the past year, WEIR has ramped up its debt from UK£1.14b to UK£1.20b – this includes both the current and long-term debt. With this rise in debt, WEIR’s cash and short-term investments stands at UK£640.6m , ready to deploy into the business. Moreover, WEIR has produced cash from operations of UK£177.1m over the same time period, leading to an operating cash to total debt ratio of 14.7%, signalling that WEIR’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In WEIR’s case, it is able to generate 0.15x cash from its debt capital.
Can WEIR meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£1.33b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of UK£2.21b, with a current ratio of 1.66x. Generally, for Machinery companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does WEIR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 64.1%, WEIR can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 WEIR’s case, the ratio of 8.06x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as WEIR’s high interest coverage is seen as responsible and safe practice.