Yahoo Finance What does Serco Group plc's (LON:SRP) Balance Sheet Tell Us About Its Future?
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Mid-caps stocks, like Serco Group plc (LON:SRP) with a market capitalization of UK£1.7b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at SRP’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SRP here.
See our latest analysis for Serco Group
Does SRP Produce Much Cash Relative To Its Debt?
Over the past year, SRP has reduced its debt from UK£292m to UK£254m – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£63m , ready to be used for running the business. Moreover, SRP has generated UK£2.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 1.1%, indicating that SRP’s debt is not covered by operating cash.
Can SRP meet its short-term obligations with the cash in hand?
With current liabilities at UK£675m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is calculated by dividing current assets by current liabilities.
Does SRP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 66%, SRP 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. 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 SRP's case, the ratio of 7.74x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SRP’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SRP’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. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure SRP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Serco Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SRP’s future growth? Take a look at our free research report of analyst consensus for SRP’s outlook.
Valuation: What is SRP 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 SRP 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.
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