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Meggitt PLC (LON:MGGT): Time For A Financial Health Check

Simply Wall St

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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£4.1b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine MGGT’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into MGGT here.

See our latest analysis for Meggitt

Does MGGT Produce Much Cash Relative To Its Debt?

MGGT has built up its total debt levels in the last twelve months, from UK£1.2b to UK£1.3b , which accounts for long term debt. With this increase in debt, MGGT's cash and short-term investments stands at UK£182m , ready to be used for running the business. Moreover, MGGT has generated UK£295m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24%, meaning that MGGT’s debt is appropriately covered by operating cash.

Does MGGT’s liquid assets cover its short-term commitments?

At the current liabilities level of UK£618m, the company has been able to meet these commitments with a current assets level of UK£1.1b, leading to a 1.8x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:MGGT Historical Debt, July 10th 2019

Can MGGT service its debt comfortably?

MGGT is a relatively highly levered company with a debt-to-equity of 46%. 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 MGGT’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 MGGT, the ratio of 8.2x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for MGGT's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Meggitt to get a more holistic view of the mid-cap by looking at:

  1. 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.
  2. 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.
  3. 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 editorial-team@simplywallst.com. 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.