Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as ITV plc (LON:ITV), with a market capitalization of UK£4.5b, rarely draw their attention from the investing community. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at ITV’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ITV here.
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ITV’s Debt (And Cash Flows)
Over the past year, ITV has maintained its debt levels at around UK£1.0b including long-term debt. At this constant level of debt, ITV's cash and short-term investments stands at UK£95m to keep the business going. Moreover, ITV has produced UK£424m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 40%, meaning that ITV’s debt is appropriately covered by operating cash.
Can ITV meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£1.3b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Media companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is ITV’s debt level acceptable?
ITV is a highly-leveraged company with debt exceeding equity by over 100%. 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 ITV’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 ITV, the ratio of 25.04x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ITV’s high interest coverage is seen as responsible and safe practice.
Although ITV’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. Since there is also no concerns around ITV'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 ITV has been performing in the past. I recommend you continue to research ITV to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ITV’s future growth? Take a look at our free research report of analyst consensus for ITV’s outlook.
- Valuation: What is ITV 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 ITV 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.