Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Independence Group NL (ASX:IGO), with a market cap of AU$3.2b, 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. Today we will look at IGO’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 IGO here.
Does IGO Produce Much Cash Relative To Its Debt?
IGO's debt levels have fallen from AU$169m to AU$113m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at AU$230m to keep the business going. On top of this, IGO has produced cash from operations of AU$329m during the same period of time, leading to an operating cash to total debt ratio of 292%, signalling that IGO’s debt is appropriately covered by operating cash.
Can IGO meet its short-term obligations with the cash in hand?
Looking at IGO’s AU$111m in current liabilities, the company has been able to meet these obligations given the level of current assets of AU$343m, with a current ratio of 3.09x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is IGO’s debt level acceptable?
With debt at 6.3% of equity, IGO may be thought of as having low leverage. This range is considered safe as IGO is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether IGO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IGO's, case, the ratio of 12.18x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IGO ample headroom to grow its debt facilities.
IGO’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure IGO has company-specific issues impacting its capital structure decisions. You should continue to research Independence Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IGO’s future growth? Take a look at our free research report of analyst consensus for IGO’s outlook.
- Valuation: What is IGO 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 IGO 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.
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