Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like The Timken Company (NYSE:TKR), with a market cap of US$2.8b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine TKR’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TKR here.
How does TKR’s operating cash flow stack up against its debt?
TKR’s debt levels surged from US$1.0b to US$1.7b over the last 12 months – this includes long-term debt. With this increase in debt, TKR currently has US$154m remaining in cash and short-term investments , ready to deploy into the business. Additionally, TKR has produced US$289m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 17%, meaning that TKR’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TKR’s case, it is able to generate 0.17x cash from its debt capital.
Can TKR meet its short-term obligations with the cash in hand?
At the current liabilities level of US$657m, the company has been able to meet these obligations given the level of current assets of US$1.8b, with a current ratio of 2.72x. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is TKR’s debt level acceptable?
Since total debt levels have outpaced equities, TKR is a highly leveraged company. 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 TKR’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 TKR, the ratio of 10.1x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving TKR ample headroom to grow its debt facilities.
Although TKR’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 TKR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Timken to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TKR’s future growth? Take a look at our free research report of analyst consensus for TKR’s outlook.
- Valuation: What is TKR 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 TKR 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.