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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Renishaw plc (LON:RSW) with a market-capitalization of UK£2.8b, rarely draw their attention. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. RSW’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Renishaw's financial health, so you should conduct further analysis into RSW here.
Is RSW’s debt level acceptable?
Debt-to-equity ratio standards differ between industries, as some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For RSW, the debt-to-equity ratio is zero, meaning that the company has no debt. It has been operating its business with zero debt and utilising only its equity capital. Investors' risk associated with debt is virtually non-existent with RSW, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can RSW meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Renishaw has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at RSW’s UK£98m in current liabilities, the company has been able to meet these commitments with a current assets level of UK£392m, leading to a 3.99x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
RSW has no debt in addition to ample cash to cover its short-term liabilities. Its safe operations reduces risk for the company and shareholders, however, some level of debt may also boost earnings growth and operational efficiency. I admit this is a fairly basic analysis for RSW's financial health. Other important fundamentals need to be considered alongside. You should continue to research Renishaw to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RSW’s future growth? Take a look at our free research report of analyst consensus for RSW’s outlook.
Valuation: What is RSW 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 RSW 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.