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The Sage Group plc (LON:SGE): Time For A Financial Health Check

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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like The Sage Group plc (LON:SGE), with a market cap of UK£7.2b, are often out of the spotlight. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. SGE’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 Sage Group’s financial health, so you should conduct further analysis into SGE here.

Check out our latest analysis for Sage Group

Does SGE produce enough cash relative to debt?

SGE’s debt level has been constant at around UK£921m over the previous year – this includes long-term debt. At this current level of debt, SGE’s cash and short-term investments stands at UK£272m for investing into the business. On top of this, SGE has produced cash from operations of UK£393m in the last twelve months, resulting in an operating cash to total debt ratio of 43%, signalling that SGE’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SGE’s case, it is able to generate 0.43x cash from its debt capital.

Can SGE meet its short-term obligations with the cash in hand?

With current liabilities at UK£1.0b, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£849m, leading to a current ratio of 0.84x.

LSE:SGE Historical Debt February 16th 19
LSE:SGE Historical Debt February 16th 19

Can SGE service its debt comfortably?

With a debt-to-equity ratio of 69%, SGE can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SGE’s case, the ratio of 15.62x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

SGE’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. However, its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven’t considered other factors such as how SGE has been performing in the past. I recommend you continue to research Sage Group to get a better picture of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for SGE’s future growth? Take a look at our free research report of analyst consensus for SGE’s outlook.

  2. Valuation: What is SGE 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 SGE is currently mispriced by the market.

  3. 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.