Yahoo Finance Are IMI plc’s (LON:IMI) Interest Costs Too High?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like IMI plc (LON:IMI), with a market cap of UK£2.95b, are often out of the spotlight. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at IMI’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of IMI’s financial health, so you should conduct further analysis into IMI here.
Check out our latest analysis for IMI
How does IMI’s operating cash flow stack up against its debt?
IMI’s debt levels surged from UK£352.1m to UK£565.4m over the last 12 months – this includes both the current and long-term debt. With this rise in debt, IMI’s cash and short-term investments stands at UK£116.4m , ready to deploy into the business. Additionally, IMI has produced cash from operations of UK£184.3m during the same period of time, resulting in an operating cash to total debt ratio of 32.6%, signalling that IMI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In IMI’s case, it is able to generate 0.33x cash from its debt capital.
Can IMI meet its short-term obligations with the cash in hand?
With current liabilities at UK£630.0m, the company has been able to meet these obligations given the level of current assets of UK£881.4m, with a current ratio of 1.4x. For Machinery 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 IMI’s debt level acceptable?
With debt reaching 91.1% of equity, IMI 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. We can check to see whether IMI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IMI’s, case, the ratio of 18.68x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IMI ample headroom to grow its debt facilities.
Next Steps:
IMI’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. Since there is also no concerns around IMI’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 IMI has been performing in the past. I recommend you continue to research IMI to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IMI’s future growth? Take a look at our free research report of analyst consensus for IMI’s outlook.
Valuation: What is IMI 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 IMI 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.
