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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like AB SKF (publ) (STO:SKF B), with a market cap of kr77b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at SKF B’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SKF B here.
Does SKF B Produce Much Cash Relative To Its Debt?
SKF B's debt levels surged from kr19b to kr21b over the last 12 months – this includes long-term debt. With this growth in debt, SKF B currently has kr12b remaining in cash and short-term investments , ready to be used for running the business. Moreover, SKF B has generated kr9.0b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 44%, meaning that SKF B’s operating cash is sufficient to cover its debt.
Can SKF B meet its short-term obligations with the cash in hand?
With current liabilities at kr23b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.21x. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Does SKF B face the risk of succumbing to its debt-load?
With debt reaching 55% of equity, SKF B 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 SKF B’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 SKF B, the ratio of 22.57x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SKF B ample headroom to grow its debt facilities.
SKF B’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. Since there is also no concerns around SKF B's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SKF B has been performing in the past. I recommend you continue to research AB SKF to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SKF B’s future growth? Take a look at our free research report of analyst consensus for SKF B’s outlook.
- Valuation: What is SKF B 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 SKF B 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 firstname.lastname@example.org. 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.