How Financially Strong Is Breedon Group plc (LON:BREE)?
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While small-cap stocks, such as Breedon Group plc (LON:BREE) with its market cap of UK£1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into BREE here.
BREE’s Debt (And Cash Flows)
BREE has built up its total debt levels in the last twelve months, from UK£134m to UK£348m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£38m , ready to be used for running the business. Additionally, BREE has produced UK£135m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 39%, meaning that BREE’s operating cash is sufficient to cover its debt.
Can BREE meet its short-term obligations with the cash in hand?
Looking at BREE’s UK£218m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of UK£253m, with a current ratio of 1.16x. The current ratio is calculated by dividing current assets by current liabilities. For Basic Materials companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Can BREE service its debt comfortably?
With a debt-to-equity ratio of 45%, BREE can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether BREE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BREE's, case, the ratio of 9.6x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as BREE’s high interest coverage is seen as responsible and safe practice.
Next Steps:
BREE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BREE's financial health. Other important fundamentals need to be considered alongside. You should continue to research Breedon Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BREE’s future growth? Take a look at our free research report of analyst consensus for BREE’s outlook.
Valuation: What is BREE 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 BREE 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
