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Is Stantec Inc. (TSE:STN) A Financially Sound Company?

Simply Wall St

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Stantec Inc. (TSE:STN), with a market cap of CA$3.6b, often get neglected by retail investors. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at STN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into STN here.

See our latest analysis for Stantec

Does STN Produce Much Cash Relative To Its Debt?

STN has built up its total debt levels in the last twelve months, from CA$911m to CA$1.8b – this includes long-term debt. With this growth in debt, STN currently has CA$119m remaining in cash and short-term investments to keep the business going. Moreover, STN has generated cash from operations of CA$205m over the same time period, leading to an operating cash to total debt ratio of 11%, meaning that STN’s operating cash is less than its debt.

Does STN’s liquid assets cover its short-term commitments?

At the current liabilities level of CA$831m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.9x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:STN Historical Debt, June 21st 2019

Does STN face the risk of succumbing to its debt-load?

With debt reaching 62% of equity, STN may be thought of as relatively highly levered. 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 STN's case, the ratio of 6.82x 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:

Although STN’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. Since there is also no concerns around STN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for STN's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Stantec to get a better picture of the mid-cap by looking at:

  1. 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.
  2. 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.
  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.

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.