What You Must Know About John Wood Group PLC’s (LSE:WG) Financial Strength
Stocks with market capitalization between $2B and $10B, such as John Wood Group PLC (LSE:WG.) with a size of GBP £4.71B, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for WG.
Can WG. service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For WG., the debt-to-equity ratio is 45.44%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. While debt-to-equity ratio has several factors at play, an easier way to check whether WG.’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. In WG.’s case, its interest is excessively covered by its earnings as the ratio sits at 7.83x. Lenders may be less hesitant to lend out more funding as WG.’s high interest coverage is seen as responsible and safe practice.
Can WG. meet its short-term obligations with the cash in hand?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. To assess this, I compare WG.’s cash and other liquid assets against its upcoming debt. Our analysis shows that WG. is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? WG.’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Since WG.’s financial position could change, I recommend assessing market expectations for WG.’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. WG.’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.
