Stocks with market capitalization between $2B and $10B, such as nVent Electric plc (NYSE:NVT) with a size of US$4.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at NVT’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 NVT here.
Does NVT produce enough cash relative to debt?
NVT has increased its debt level by about US$944m over the last 12 months accounting for long term debt. With this ramp up in debt, NVT’s cash and short-term investments stands at US$106m , ready to deploy into the business. On top of this, NVT has generated US$294m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 31%, indicating that NVT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NVT’s case, it is able to generate 0.31x cash from its debt capital.
Does NVT’s liquid assets cover its short-term commitments?
At the current liabilities level of US$425m, it seems that the business has been able to meet these obligations given the level of current assets of US$835m, with a current ratio of 1.96x. For Electrical 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 NVT’s debt level acceptable?
NVT’s level of debt is appropriate relative to its total equity, at 35%. NVT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether NVT 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 NVT’s, case, the ratio of 16.36x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as NVT’s high interest coverage is seen as responsible and safe practice.
NVT’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure NVT has company-specific issues impacting its capital structure decisions. I suggest you continue to research nVent Electric to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NVT’s future growth? Take a look at our free research report of analyst consensus for NVT’s outlook.
- Valuation: What is NVT 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 NVT 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.
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