Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as BorgWarner Inc. (NYSE:BWA), with a market capitalization of US$7.6b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. BWA’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into BWA here.
BWA’s Debt (And Cash Flows)
Over the past year, BWA has maintained its debt levels at around US$2.1b – this includes long-term debt. At this stable level of debt, BWA currently has US$739m remaining in cash and short-term investments to keep the business going. Moreover, BWA has produced cash from operations of US$1.1b in the last twelve months, leading to an operating cash to total debt ratio of 53%, signalling that BWA’s current level of operating cash is high enough to cover debt.
Does BWA’s liquid assets cover its short-term commitments?
Looking at BWA’s US$2.4b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$3.8b, leading to a 1.59x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can BWA service its debt comfortably?
With debt reaching 49% of equity, BWA may be thought of as relatively highly levered. 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 BWA’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 BWA, the ratio of 21.27x 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.
Although BWA’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. Keep in mind I haven't considered other factors such as how BWA has been performing in the past. You should continue to research BorgWarner to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BWA’s future growth? Take a look at our free research report of analyst consensus for BWA’s outlook.
- Valuation: What is BWA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BWA is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.