Yahoo Finance Is Spirax-Sarco Engineering plc (LON:SPX) A Financially Sound Company?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Spirax-Sarco Engineering plc (LON:SPX) with a market-capitalization of UK£5.0b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at SPX’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SPX here.
View our latest analysis for Spirax-Sarco Engineering
Does SPX produce enough cash relative to debt?
SPX’s debt levels surged from UK£274m to UK£549m over the last 12 months – this includes long-term debt. With this growth in debt, SPX currently has UK£176m remaining in cash and short-term investments , ready to deploy into the business. Additionally, SPX has produced UK£166m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, meaning that SPX’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SPX’s case, it is able to generate 0.3x cash from its debt capital.
Does SPX’s liquid assets cover its short-term commitments?
With current liabilities at UK£223m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.71x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SPX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 85%, SPX can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SPX 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 SPX’s, case, the ratio of 30.39x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although SPX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for SPX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Spirax-Sarco Engineering to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SPX’s future growth? Take a look at our free research report of analyst consensus for SPX’s outlook.
Valuation: What is SPX 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 SPX 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.
