Yahoo Finance Is Halma plc's (LON:HLMA) Liquidity Good Enough?
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Mid-caps stocks, like Halma plc (LON:HLMA) with a market capitalization of UK£6.8b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Today we will look at HLMA’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. Don’t forget that this is a general and concentrated examination of Halma's financial health, so you should conduct further analysis into HLMA here.
Check out our latest analysis for Halma
Does HLMA Produce Much Cash Relative To Its Debt?
Over the past year, HLMA has maintained its debt levels at around UK£261m which accounts for long term debt. At this current level of debt, HLMA's cash and short-term investments stands at UK£66m , ready to be used for running the business. On top of this, HLMA has generated cash from operations of UK£194m over the same time period, leading to an operating cash to total debt ratio of 74%, indicating that HLMA’s debt is appropriately covered by operating cash.
Does HLMA’s liquid assets cover its short-term commitments?
Looking at HLMA’s UK£190m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can HLMA service its debt comfortably?
With a debt-to-equity ratio of 28%, HLMA's debt level may be seen as prudent. This range is considered safe as HLMA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if HLMA’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 HLMA, the ratio of 24.85x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HLMA’s high interest coverage is seen as responsible and safe practice.
Next Steps:
HLMA’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven't considered other factors such as how HLMA has been performing in the past. You should continue to research Halma to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for HLMA’s future growth? Take a look at our free research report of analyst consensus for HLMA’s outlook.
Valuation: What is HLMA 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 HLMA 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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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.
