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Is Brenntag AG's (ETR:BNR) Balance Sheet A Threat To Its Future?

Simply Wall St

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Brenntag AG (ETR:BNR), with a market capitalization of €7.3b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. BNR’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into BNR here.

Check out our latest analysis for Brenntag

Does BNR Produce Much Cash Relative To Its Debt?

BNR has sustained its debt level by about €2.2b over the last 12 months which accounts for long term debt. At this stable level of debt, BNR currently has €402m remaining in cash and short-term investments to keep the business going. On top of this, BNR has produced cash from operations of €375m over the same time period, leading to an operating cash to total debt ratio of 17%, signalling that BNR’s operating cash is less than its debt.

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

Looking at BNR’s €2.0b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €3.7b, with a current ratio of 1.84x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

XTRA:BNR Historical Debt, April 26th 2019

Is BNR’s debt level acceptable?

With a debt-to-equity ratio of 65%, BNR can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 BNR's case, the ratio of 8.53x 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:

BNR’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 BNR's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Brenntag to get a more holistic view of the mid-cap by looking at:

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

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.