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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like UDG Healthcare plc (LON:UDG), with a market cap of UK£1.5b, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at UDG’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into UDG here.
UDG’s Debt (And Cash Flows)
Over the past year, UDG has maintained its debt levels at around US$244m – this includes long-term debt. At this stable level of debt, UDG's cash and short-term investments stands at US$183m to keep the business going. Moreover, UDG has produced US$103m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42%, signalling that UDG’s debt is appropriately covered by operating cash.
Can UDG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$279m, it appears that the company has been able to meet these obligations given the level of current assets of US$562m, with a current ratio of 2.01x. The current ratio is the number you get when you divide current assets by current liabilities. For Healthcare companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does UDG face the risk of succumbing to its debt-load?
UDG’s level of debt is appropriate relative to its total equity, at 28%. UDG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether UDG 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 UDG's, case, the ratio of 14.76x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as UDG’s high interest coverage is seen as responsible and safe practice.
UDG’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure UDG has company-specific issues impacting its capital structure decisions. I suggest you continue to research UDG Healthcare to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UDG’s future growth? Take a look at our free research report of analyst consensus for UDG’s outlook.
- Valuation: What is UDG 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 UDG 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.
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 firstname.lastname@example.org. 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.