Yahoo Finance What You Must Know About The Weir Group PLC's (LON:WEIR) Financial Strength
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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like The Weir Group PLC (LON:WEIR), with a market cap of UK£4.2b, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. WEIR’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WEIR here.
View our latest analysis for Weir Group
Does WEIR Produce Much Cash Relative To Its Debt?
Over the past year, WEIR has ramped up its debt from UK£1.1b to UK£1.4b , which includes long-term debt. With this growth in debt, WEIR currently has UK£263m remaining in cash and short-term investments to keep the business going. Additionally, WEIR has generated cash from operations of UK£218m during the same period of time, resulting in an operating cash to total debt ratio of 16%, signalling that WEIR’s debt is not covered by operating cash.
Does WEIR’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£1.5b, it appears that the company has been able to meet these obligations given the level of current assets of UK£2.0b, with a current ratio of 1.3x. The current ratio is the number you get when you divide current assets by current liabilities. 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.
Does WEIR face the risk of succumbing to its debt-load?
With debt reaching 65% of equity, WEIR may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if WEIR’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 WEIR, the ratio of 8.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving WEIR ample headroom to grow its debt facilities.
Next Steps:
Although WEIR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around WEIR'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 WEIR has been performing in the past. I recommend you continue to research Weir Group to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for WEIR’s future growth? Take a look at our free research report of analyst consensus for WEIR’s outlook.
Valuation: What is WEIR 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 WEIR 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.
