Yahoo Finance What Investors Should Know About Melrose Industries PLC’s (LON:MRO) Financial Strength
Investors pursuing a solid, dependable stock investment can often be led to Melrose Industries PLC (LON:MRO), a large-cap worth UK£8.5b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. Today we will look at Melrose Industries’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into MRO here.
See our latest analysis for Melrose Industries
How does MRO’s operating cash flow stack up against its debt?
Over the past year, MRO has ramped up its debt from UK£710m to UK£3.9b , which comprises of short- and long-term debt. With this growth in debt, MRO’s cash and short-term investments stands at UK£430m for investing into the business. Additionally, MRO has produced UK£137m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 3.6%, signalling that MRO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In MRO’s case, it is able to generate 0.036x cash from its debt capital.
Can MRO meet its short-term obligations with the cash in hand?
Looking at MRO’s most recent UK£3.2b liabilities, the company has been able to meet these obligations given the level of current assets of UK£4.8b, with a current ratio of 1.5x. Generally, for Electrical companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MRO service its debt comfortably?
MRO is a relatively highly levered company with a debt-to-equity of 49%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. Though, since MRO is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
MRO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. I admit this is a fairly basic analysis for MRO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Melrose Industries to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for MRO’s future growth? Take a look at our free research report of analyst consensus for MRO’s outlook.
Valuation: What is MRO 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 MRO 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.
