Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like IDP Education Limited (ASX:IEL), with a market cap of AU$4.7b, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine IEL’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. Don’t forget that this is a general and concentrated examination of IDP Education’s financial health, so you should conduct further analysis into IEL here.
IEL’s Debt (And Cash Flows)
IEL has built up its total debt levels in the last twelve months, from AU$47m to AU$64m , which includes long-term debt. With this growth in debt, IEL currently has AU$55m remaining in cash and short-term investments to keep the business going. On top of this, IEL has generated AU$84m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 130%, indicating that IEL’s current level of operating cash is high enough to cover debt.
Can IEL meet its short-term obligations with the cash in hand?
Looking at IEL’s AU$134m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$179m, with a current ratio of 1.34x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Consumer Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can IEL service its debt comfortably?
IEL is a relatively highly levered company with a debt-to-equity of 41%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In IEL's case, the ratio of 113x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IEL ample headroom to grow its debt facilities.
IEL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 IEL has been performing in the past. I suggest you continue to research IDP Education to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IEL’s future growth? Take a look at our free research report of analyst consensus for IEL’s outlook.
- Valuation: What is IEL 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 IEL 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.