Are Pearson plc’s (LSE:PSON) Interest Costs Too High?
Mid-caps stocks, like Pearson plc (LSE:PSON) with a market capitalization of GBP £5.61B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. 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 will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Pearson
Is PSON’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of PSON, the debt-to-equity ratio is 56.99%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In PSON’s case, its interest is excessively covered by its earnings as the ratio sits at 7.23x. Debtors may be willing to loan the company more money, giving PSON ample headroom to grow its debt facilities.
Can PSON pay its short-term liabilities?
Another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare PSON’s cash and other liquid assets against its upcoming debt. Our analysis shows that PSON does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? PSON’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Given that PSON’s capital structure may change, I suggest researching market expectations for PSON’s future growth on our free analysis platform.
Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. PSON’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.
