Is Ferguson plc (LON:FERG) A Financially Sound Company?
Ferguson plc (LSE:FERG), a large-cap worth UK£12.79B, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, its financial health remains the key to continued success. This article will examine Ferguson’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into FERG here. Check out our latest analysis for Ferguson
Does FERG produce enough cash relative to debt?
Over the past year, FERG has ramped up its debt from UK£1.91B to UK£2.47B , which is made up of current and long term debt. With this increase in debt, FERG’s cash and short-term investments stands at UK£1.92B for investing into the business. On top of this, FERG has generated UK£752.00M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30.51%, indicating that FERG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FERG’s case, it is able to generate 0.31x cash from its debt capital.
Can FERG meet its short-term obligations with the cash in hand?
With current liabilities at UK£4.91B, it appears that the company has been able to meet these obligations given the level of current assets of UK£7.13B, with a current ratio of 1.45x. Generally, for Trade Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does FERG face the risk of succumbing to its debt-load?
FERG is a relatively highly levered company with a debt-to-equity of 71.74%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. 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. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In FERG’s case, the ratio of 24.22x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like FERG are considered a risk-averse investment.
Next Steps:
Although FERG’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. Since there is also no concerns around FERG’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FERG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ferguson to get a more holistic view of the large-cap by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for FERG’s future growth? Take a look at our free research report of analyst consensus for FERG’s outlook.
2. Valuation: What is FERG 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 FERG is currently mispriced by the market.
3. 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 pass 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.
