Yahoo Finance Is Rotork plc (LON:ROR) As Strong As Its Balance Sheet Indicates?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Rotork plc (LON:ROR), with a market cap of UK£2.4b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine ROR’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ROR here.
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Does ROR produce enough cash relative to debt?
ROR has shrunken its total debt levels in the last twelve months, from UK£108m to UK£76m – this includes long-term debt. With this reduction in debt, ROR’s cash and short-term investments stands at UK£70m , ready to deploy into the business. Moreover, ROR has produced UK£108m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 142%, indicating that ROR’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ROR’s case, it is able to generate 1.42x cash from its debt capital.
Can ROR meet its short-term obligations with the cash in hand?
Looking at ROR’s UK£168m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.04x. Usually, for Machinery companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ROR’s debt level acceptable?
ROR’s level of debt is appropriate relative to its total equity, at 16%. This range is considered safe as ROR is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether ROR 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 ROR’s, case, the ratio of 75.48x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ROR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
ROR’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. 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 ROR has been performing in the past. I recommend you continue to research Rotork to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ROR’s future growth? Take a look at our free research report of analyst consensus for ROR’s outlook.
Valuation: What is ROR 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 ROR 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.
