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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as West Pharmaceutical Services, Inc. (NYSE:WST) with a market-capitalization of US$9.2b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at WST’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. Don’t forget that this is a general and concentrated examination of West Pharmaceutical Services's financial health, so you should conduct further analysis into WST here.
WST’s Debt (And Cash Flows)
Over the past year, WST has ramped up its debt from US$198m to US$273m , which includes long-term debt. With this rise in debt, WST currently has US$266m remaining in cash and short-term investments , ready to be used for running the business. On top of this, WST has produced US$291m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 107%, indicating that WST’s debt is appropriately covered by operating cash.
Can WST pay its short-term liabilities?
At the current liabilities level of US$301m, it appears that the company has been able to meet these obligations given the level of current assets of US$868m, with a current ratio of 2.88x. The current ratio is calculated by dividing current assets by current liabilities. For Medical Equipment companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is WST’s debt level acceptable?
With debt at 14% of equity, WST may be thought of as appropriately levered. WST is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether WST 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 WST's, case, the ratio of 40.66x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WST ample headroom to grow its debt facilities.
WST has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven't considered other factors such as how WST has been performing in the past. I recommend you continue to research West Pharmaceutical Services to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for WST’s future growth? Take a look at our free research report of analyst consensus for WST’s outlook.
- Valuation: What is WST 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 WST 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 email@example.com. 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.