Yahoo Finance Does Stantec Inc’s (TSE:STN) Debt Level Pose A Problem?
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Stantec Inc (TSE:STN) with a market-capitalization of CA$3.8b, rarely draw their attention. 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. STN’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into STN here.
Check out our latest analysis for Stantec
Does STN produce enough cash relative to debt?
STN has built up its total debt levels in the last twelve months, from CA$802m to CA$933m – this includes both the current and long-term debt. With this growth in debt, STN’s cash and short-term investments stands at CA$230m for investing into the business. On top of this, STN has generated CA$147m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 16%, signalling that STN’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In STN’s case, it is able to generate 0.16x cash from its debt capital.
Can STN pay its short-term liabilities?
Looking at STN’s most recent CA$1.0b liabilities, the company has been able to meet these obligations given the level of current assets of CA$1.7b, with a current ratio of 1.69x. For Professional Services 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.
Does STN face the risk of succumbing to its debt-load?
STN is a relatively highly levered company with a debt-to-equity of 47%. 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 STN’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 STN, the ratio of 9.32x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as STN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
At its current level of cash flow coverage, STN has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for STN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Stantec to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for STN’s future growth? Take a look at our free research report of analyst consensus for STN’s outlook.
Valuation: What is STN 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 STN 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 editorial-team@simplywallst.com.
