Yahoo Finance Does Rentokil Initial plc’s (LON:RTO) Debt Level Pose A Problem?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Rentokil Initial plc (LON:RTO), with a market capitalization of UK£6.1b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine RTO’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into RTO here.
See our latest analysis for Rentokil Initial
How much cash does RTO generate through its operations?
RTO has shrunken its total debt levels in the last twelve months, from UK£1.5b to UK£1.2b – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£163m for investing into the business. Additionally, RTO has produced UK£347m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 28%, signalling that RTO’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RTO’s case, it is able to generate 0.28x cash from its debt capital.
Can RTO meet its short-term obligations with the cash in hand?
Looking at RTO’s UK£740m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.04x. Generally, for Commercial 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.
Is RTO’s debt level acceptable?
RTO is a highly-leveraged company with debt exceeding equity by over 100%. 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 RTO’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 RTO, the ratio of 6.24x suggests that interest is appropriately 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 RTO’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 RTO’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for RTO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Rentokil Initial to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for RTO’s future growth? Take a look at our free research report of analyst consensus for RTO’s outlook.
Valuation: What is RTO 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 RTO 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.
