Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Incitec Pivot Limited (ASX:IPL) with a market-capitalization of AU$6.9b, rarely draw their attention. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at IPL’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into IPL here.
Does IPL produce enough cash relative to debt?
IPL has sustained its debt level by about AU$2.3b over the last 12 months made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at AU$191m , ready to deploy into the business. Moreover, IPL has produced cash from operations of AU$610m in the last twelve months, leading to an operating cash to total debt ratio of 27%, indicating that IPL’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 IPL’s case, it is able to generate 0.27x cash from its debt capital.
Can IPL meet its short-term obligations with the cash in hand?
Looking at IPL’s most recent AU$1.6b liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of AU$1.2b, with a current ratio of 0.76x.
Is IPL’s debt level acceptable?
IPL is a relatively highly levered company with a debt-to-equity of 49%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if IPL’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 IPL, the ratio of 4.01x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as IPL’s high interest coverage is seen as responsible and safe practice.
Although IPL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure IPL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Incitec Pivot to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IPL’s future growth? Take a look at our free research report of analyst consensus for IPL’s outlook.
- Valuation: What is IPL 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 IPL 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.