Ashtead Group plc (LON:AHT): Time For A Financial Health Check
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Ashtead Group plc (LON:AHT), a large-cap worth UK£9.5b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Ashtead Group’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into AHT here.
Check out our latest analysis for Ashtead Group
How much cash does AHT generate through its operations?
AHT’s debt levels surged from UK£2.9b to UK£3.6b over the last 12 months , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£23m , ready to deploy into the business. Moreover, AHT has produced cash from operations of UK£522m in the last twelve months, resulting in an operating cash to total debt ratio of 14%, signalling that AHT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AHT’s case, it is able to generate 0.14x cash from its debt capital.
Can AHT meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£853m, it seems that the business has been able to meet these commitments with a current assets level of UK£1.0b, leading to a 1.2x current account ratio. Generally, for Trade Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does AHT face the risk of succumbing to its debt-load?
Ashtead Group is a highly levered company given that total debt exceeds equity. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if AHT’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In AHT’s case, the ratio of 8.85x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as AHT is a safe investment.
Next Steps:
At its current level of cash flow coverage, AHT has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how AHT has been performing in the past. I suggest you continue to research Ashtead Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AHT’s future growth? Take a look at our free research report of analyst consensus for AHT’s outlook.
Valuation: What is AHT 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 AHT 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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