Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Pentair plc (NYSE:PNR), with a market cap of US$6.6b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. PNR’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PNR here.
How much cash does PNR generate through its operations?
Over the past year, PNR has reduced its debt from US$1.5b to US$799m , which includes long-term debt. With this reduction in debt, PNR currently has US$65m remaining in cash and short-term investments , ready to deploy into the business. On top of this, PNR has produced cash from operations of US$543m in the last twelve months, resulting in an operating cash to total debt ratio of 68%, indicating that PNR’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 PNR’s case, it is able to generate 0.68x cash from its debt capital.
Does PNR’s liquid assets cover its short-term commitments?
With current liabilities at US$707m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PNR’s debt level acceptable?
With a debt-to-equity ratio of 42%, PNR can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if PNR’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 PNR, the ratio of 20.55x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as PNR’s high interest coverage is seen as responsible and safe practice.
PNR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around PNR’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 PNR has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pentair to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PNR’s future growth? Take a look at our free research report of analyst consensus for PNR’s outlook.
- Valuation: What is PNR 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 PNR 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.