Stocks with market capitalization between $2B and $10B, such as Franklin Electric Co Inc (NASDAQ:FELE) with a size of US$2.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine FELE’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 top-level understanding, so I encourage you to look further into FELE here.
How does FELE’s operating cash flow stack up against its debt?
Over the past year, FELE has maintained its debt levels at around US$263m comprising of short- and long-term debt. At this stable level of debt, FELE’s cash and short-term investments stands at US$70m for investing into the business. Moreover, FELE has produced US$84m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 32%, indicating that FELE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FELE’s case, it is able to generate 0.32x cash from its debt capital.
Does FELE’s liquid assets cover its short-term commitments?
Looking at FELE’s most recent US$311m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$640m, with a current ratio of 2.06x. For Machinery companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is FELE’s debt level acceptable?
With a debt-to-equity ratio of 37%, FELE’s debt level may be seen as prudent. FELE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if FELE’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 FELE, the ratio of 13.67x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as FELE’s high interest coverage is seen as responsible and safe practice.
FELE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for FELE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Franklin Electric to get a better picture of the stock by looking at:
- Valuation: What is FELE 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 FELE is currently mispriced by the market.
- Historical Performance: What has FELE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 firstname.lastname@example.org.