Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Royal Mail plc (LSE:RMG), with a market cap of UK£5.93B, are often out of the spotlight. 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. This article will examine RMG’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. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into RMG here. Check out our latest analysis for Royal Mail
How does RMG’s operating cash flow stack up against its debt?
RMG’s debt levels surged from UK£612.00M to UK£657.00M over the last 12 months – this includes both the current and long-term debt. With this increase in debt, RMG currently has UK£299.00M remaining in cash and short-term investments for investing into the business. On top of this, RMG has produced UK£754.00M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 114.76%, signalling that RMG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RMG’s case, it is able to generate 1.15x cash from its debt capital.
Does RMG’s liquid assets cover its short-term commitments?
Looking at RMG’s most recent UK£2.02B liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.74x, which is below the prudent industry ratio of 3x.
Does RMG face the risk of succumbing to its debt-load?
RMG’s level of debt is appropriate relative to its total equity, at 15.02%. This range is considered safe as RMG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if RMG’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 RMG, the ratio of 33.21x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RMG ample headroom to grow its debt facilities.