Yahoo Finance What does Sonic Healthcare Limited’s (ASX:SHL) Balance Sheet Tell Us About Its Future?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Sonic Healthcare Limited (ASX:SHL), with a market capitalization of AU$9.7b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at SHL’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into SHL here.
View our latest analysis for Sonic Healthcare
How does SHL’s operating cash flow stack up against its debt?
Over the past year, SHL has maintained its debt levels at around AU$2.8b including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$313m , ready to deploy into the business. On top of this, SHL has produced cash from operations of AU$768m in the last twelve months, leading to an operating cash to total debt ratio of 27%, indicating that SHL’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 SHL’s case, it is able to generate 0.27x cash from its debt capital.
Does SHL’s liquid assets cover its short-term commitments?
Looking at SHL’s AU$868m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$1.2b, with a current ratio of 1.42x. Generally, for Healthcare companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SHL face the risk of succumbing to its debt-load?
With debt reaching 65% of equity, SHL may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SHL’s case, the ratio of 8.9x 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:
Although SHL’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. Since there is also no concerns around SHL’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how SHL has been performing in the past. You should continue to research Sonic Healthcare to get a better picture of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SHL’s future growth? Take a look at our free research report of analyst consensus for SHL’s outlook.
Valuation: What is SHL 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 SHL 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.
