Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Wm Morrison Supermarkets PLC (LON:MRW) with a market-capitalization of UK£6.0b, rarely draw their attention. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at MRW’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Wm Morrison Supermarkets’s financial health, so you should conduct further analysis into MRW here.
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How much cash does MRW generate through its operations?
MRW has shrunken its total debt levels in the last twelve months, from UK£1.6b to UK£1.2b , which comprises of short- and long-term debt. With this reduction in debt, MRW’s cash and short-term investments stands at UK£203m for investing into the business. Additionally, MRW has generated cash from operations of UK£713m in the last twelve months, resulting in an operating cash to total debt ratio of 60%, meaning that MRW’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 MRW’s case, it is able to generate 0.6x cash from its debt capital.
Can MRW pay its short-term liabilities?
With current liabilities at UK£3.3b, the company may not have an easy time meeting these commitments with a current assets level of UK£1.3b, leading to a current ratio of 0.38x.
Is MRW’s debt level acceptable?
With a debt-to-equity ratio of 25%, MRW’s debt level may be seen as prudent. This range is considered safe as MRW is not taking on too much debt obligation, which may be constraining for future growth. We can test if MRW’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 MRW, the ratio of 9.1x suggests that interest is appropriately 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:
MRW has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. However, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure MRW has company-specific issues impacting its capital structure decisions. You should continue to research Wm Morrison Supermarkets to get a more holistic view of the stock by looking at: