Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Meggitt PLC (LON:MGGT) with a market-capitalization of UK£3.6b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at MGGT’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Meggitt’s financial health, so you should conduct further analysis into MGGT here.
How much cash does MGGT generate through its operations?
Over the past year, MGGT has maintained its debt levels at around UK£1.2b – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at UK£104m for investing into the business. Additionally, MGGT has generated cash from operations of UK£380m in the last twelve months, resulting in an operating cash to total debt ratio of 31%, signalling that MGGT’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 MGGT’s case, it is able to generate 0.31x cash from its debt capital.
Can MGGT meet its short-term obligations with the cash in hand?
Looking at MGGT’s UK£632m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. For Aerospace & Defense 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.
Is MGGT’s debt level acceptable?
MGGT is a relatively highly levered company with a debt-to-equity of 51%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MGGT 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 MGGT’s, case, the ratio of 12.45x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as MGGT’s high interest coverage is seen as responsible and safe practice.
Although MGGT’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 MGGT’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MGGT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Meggitt to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MGGT’s future growth? Take a look at our free research report of analyst consensus for MGGT’s outlook.
- Valuation: What is MGGT 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 MGGT 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.