Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Mid-caps stocks, like Johnson Matthey Plc (LON:JMAT) with a market capitalization of UK£6.1b, 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. Today we will look at JMAT’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into JMAT here.
JMAT’s Debt (And Cash Flows)
JMAT has built up its total debt levels in the last twelve months, from UK£1.1b to UK£1.3b , which includes long-term debt. With this rise in debt, JMAT currently has UK£459m remaining in cash and short-term investments , ready to be used for running the business. Additionally, JMAT has generated cash from operations of UK£334m over the same time period, resulting in an operating cash to total debt ratio of 25%, meaning that JMAT’s operating cash is sufficient to cover its debt.
Can JMAT meet its short-term obligations with the cash in hand?
Looking at JMAT’s UK£2.1b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£3.4b, leading to a 1.64x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals 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.
Is JMAT’s debt level acceptable?
With a debt-to-equity ratio of 50%, JMAT 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. 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 JMAT's case, the ratio of 12.33x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as JMAT’s high interest coverage is seen as responsible and safe practice.
Although JMAT’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 JMAT'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 JMAT has been performing in the past. I suggest you continue to research Johnson Matthey to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JMAT’s future growth? Take a look at our free research report of analyst consensus for JMAT’s outlook.
- Valuation: What is JMAT 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 JMAT 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 firstname.lastname@example.org. 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.