Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Electrocomponents plc (LON:ECM), with a market capitalization of UK£2.7b, rarely draw their attention from the investing community. 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. Let’s take a look at ECM’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ECM here.
Does ECM produce enough cash relative to debt?
ECM has shrunken its total debt levels in the last twelve months, from UK£209m to UK£188m , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£123m for investing into the business. Moreover, ECM has generated cash from operations of UK£127m during the same period of time, resulting in an operating cash to total debt ratio of 67%, signalling that ECM’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 ECM’s case, it is able to generate 0.67x cash from its debt capital.
Does ECM’s liquid assets cover its short-term commitments?
Looking at ECM’s most recent UK£391m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.92x. Usually, for Electronic companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ECM’s debt level acceptable?
ECM’s level of debt is appropriate relative to its total equity, at 39%. This range is considered safe as ECM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ECM’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 ECM, the ratio of 21.08x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ECM ample headroom to grow its debt facilities.
ECM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 ECM has been performing in the past. You should continue to research Electrocomponents to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECM’s future growth? Take a look at our free research report of analyst consensus for ECM’s outlook.
- Valuation: What is ECM 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 ECM 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.