Yahoo Finance How Financially Strong Is Linamar Corporation (TSE:LNR)?
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Stocks with market capitalization between $2B and $10B, such as Linamar Corporation (TSE:LNR) with a size of CA$2.9b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. LNR’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 LNR here.
Check out our latest analysis for Linamar
LNR’s Debt (And Cash Flows)
LNR's debt level has been constant at around CA$2.6b over the previous year which accounts for long term debt. At this constant level of debt, LNR currently has CA$485m remaining in cash and short-term investments to keep the business going. On top of this, LNR has generated cash from operations of CA$786m during the same period of time, leading to an operating cash to total debt ratio of 31%, signalling that LNR’s operating cash is sufficient to cover its debt.
Can LNR pay its short-term liabilities?
With current liabilities at CA$1.7b, it appears that the company has been able to meet these obligations given the level of current assets of CA$3.4b, with a current ratio of 2.01x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Auto Components companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LNR’s debt level acceptable?
With a debt-to-equity ratio of 66%, LNR can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if LNR’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 LNR, the ratio of 18.82x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LNR ample headroom to grow its debt facilities.
Next Steps:
LNR’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 LNR's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how LNR has been performing in the past. I suggest you continue to research Linamar to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LNR’s future growth? Take a look at our free research report of analyst consensus for LNR’s outlook.
Valuation: What is LNR 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 LNR 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 editorial-team@simplywallst.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.
