Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like HomeServe plc (LON:HSV), with a market cap of UK£3.1b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at HSV’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HSV here.
How much cash does HSV generate through its operations?
HSV has sustained its debt level by about UK£296m over the last 12 months – this includes both the current and long-term debt. At this current level of debt, HSV’s cash and short-term investments stands at UK£58m for investing into the business. Additionally, HSV has produced cash from operations of UK£130m during the same period of time, leading to an operating cash to total debt ratio of 44%, indicating that HSV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In HSV’s case, it is able to generate 0.44x cash from its debt capital.
Does HSV’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£557m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does HSV face the risk of succumbing to its debt-load?
With debt reaching 54% of equity, HSV 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 HSV’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 HSV, the ratio of 14.46x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HSV’s high interest coverage is seen as responsible and safe practice.
Although HSV’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. This is only a rough assessment of financial health, and I’m sure HSV has company-specific issues impacting its capital structure decisions. I suggest you continue to research HomeServe to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HSV’s future growth? Take a look at our free research report of analyst consensus for HSV’s outlook.
- Valuation: What is HSV 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 HSV 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 firstname.lastname@example.org.