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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Compagnie d'Entreprises CFE SA (EBR:CFEB), with a market cap of €2.1b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at CFEB’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CFEB here.
Does CFEB Produce Much Cash Relative To Its Debt?
Over the past year, CFEB has ramped up its debt from €890m to €1.1b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €388m , ready to be used for running the business. Additionally, CFEB has produced cash from operations of €224m during the same period of time, leading to an operating cash to total debt ratio of 21%, signalling that CFEB’s current level of operating cash is high enough to cover debt.
Can CFEB pay its short-term liabilities?
Looking at CFEB’s €2.3b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x. The current ratio is calculated by dividing current assets by current liabilities.
Can CFEB service its debt comfortably?
CFEB is a relatively highly levered company with a debt-to-equity of 61%. 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 CFEB’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 CFEB, the ratio of 24.26x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CFEB ample headroom to grow its debt facilities.
Although CFEB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for CFEB's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Compagnie d'Entreprises CFE to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CFEB’s future growth? Take a look at our free research report of analyst consensus for CFEB’s outlook.
- Valuation: What is CFEB 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 CFEB 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 firstname.lastname@example.org. 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.