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Is Smiths Group plc’s (LON:SMIN) Balance Sheet Strong Enough To Weather A Storm?

Mid-caps stocks, like Smiths Group plc (LON:SMIN) with a market capitalization of UK£6.44b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. SMIN’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 SMIN here.

See our latest analysis for Smiths Group

Does SMIN produce enough cash relative to debt?

SMIN has built up its total debt levels in the last twelve months, from UK£1.45b to UK£1.55b , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at UK£591.0m , ready to deploy into the business. Additionally, SMIN has generated cash from operations of UK£413.0m during the same period of time, leading to an operating cash to total debt ratio of 26.6%, signalling that SMIN’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 SMIN’s case, it is able to generate 0.27x cash from its debt capital.

Can SMIN meet its short-term obligations with the cash in hand?

Looking at SMIN’s most recent UK£703.0m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.47x. For Industrials companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

LSE:SMIN Historical Debt August 30th 18
LSE:SMIN Historical Debt August 30th 18

Is SMIN’s debt level acceptable?

SMIN is a relatively highly levered company with a debt-to-equity of 78.9%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In SMIN’s case, the ratio of 8.56x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SMIN ample headroom to grow its debt facilities.

Next Steps:

SMIN’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 SMIN’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 SMIN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Smiths Group to get a more holistic view of the mid-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for SMIN’s future growth? Take a look at our free research report of analyst consensus for SMIN’s outlook.

  2. Valuation: What is SMIN 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 SMIN is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.com.