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Is Arkema SA’s (EPA:AKE) Balance Sheet A Threat To Its Future?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Arkema SA (EPA:AKE), with a market capitalization of €6.8b, 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. AKE’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Arkema’s financial health, so you should conduct further analysis into AKE here.

View our latest analysis for Arkema

Does AKE produce enough cash relative to debt?

AKE’s debt levels have fallen from €3.0b to €2.5b over the last 12 months , which is made up of current and long term debt. With this reduction in debt, AKE currently has €1.1b remaining in cash and short-term investments for investing into the business. Moreover, AKE has produced €943m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 38%, signalling that AKE’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 AKE’s case, it is able to generate 0.38x cash from its debt capital.

Can AKE meet its short-term obligations with the cash in hand?

Looking at AKE’s most recent €1.7b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.4x. Generally, for Chemicals 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.

ENXTPA:AKE Historical Debt October 29th 18

Is AKE’s debt level acceptable?

With debt reaching 52% of equity, AKE 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. We can check to see whether AKE 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 AKE’s, case, the ratio of 13.46x suggests that interest is comfortably 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 AKE’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. I admit this is a fairly basic analysis for AKE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Arkema to get a more holistic view of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AKE’s future growth? Take a look at our free research report of analyst consensus for AKE’s outlook.
  2. Valuation: What is AKE 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 AKE is currently mispriced by the market.
  3. 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.