What does Link Administration Holdings Limited’s (ASX:LNK) Balance Sheet Tell Us About Its Future?
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Link Administration Holdings Limited (ASX:LNK), with a market cap of AU$3.7b, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at LNK’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into LNK here.
Check out our latest analysis for Link Administration Holdings
How does LNK’s operating cash flow stack up against its debt?
Over the past year, LNK has ramped up its debt from AU$313m to AU$822m – this includes long-term debt. With this growth in debt, LNK’s cash and short-term investments stands at AU$266m for investing into the business. Additionally, LNK has generated cash from operations of AU$208m during the same period of time, resulting in an operating cash to total debt ratio of 25%, meaning that LNK’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LNK’s case, it is able to generate 0.25x cash from its debt capital.
Does LNK’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$972m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. Generally, for IT companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is LNK’s debt level acceptable?
LNK is a relatively highly levered company with a debt-to-equity of 43%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if LNK’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 LNK, the ratio of 13.34x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as LNK’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although LNK’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure LNK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Link Administration Holdings to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LNK’s future growth? Take a look at our free research report of analyst consensus for LNK’s outlook.
Valuation: What is LNK 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 LNK 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.
