Compass Group PLC (LON:CPG): Time For A Financial Health Check
The size of Compass Group PLC (LSE:CPG), a UK£25.54B large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. This article will examine Compass Group’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CPG here. See our latest analysis for Compass Group
Does CPG produce enough cash relative to debt?
CPG has built up its total debt levels in the last twelve months, from UK£3.41B to UK£3.98B , which comprises of short- and long-term debt. With this rise in debt, CPG’s cash and short-term investments stands at UK£391.00M , ready to deploy into the business. Moreover, CPG has produced cash from operations of UK£1.63B during the same period of time, leading to an operating cash to total debt ratio of 41.07%, indicating that CPG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CPG’s case, it is able to generate 0.41x cash from its debt capital.
Can CPG meet its short-term obligations with the cash in hand?
With current liabilities at UK£4.28B, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.83x, which is below the prudent industry ratio of 3x.
Does CPG face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Compass Group is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. The sustainability of CPG’s debt levels can be assessed by comparing the company’s interest payments to earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In CPG’s case, the ratio of 14.66x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CPG are considered a risk-averse investment.
Next Steps:
CPG’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. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for CPG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Compass Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CPG’s future growth? Take a look at our free research report of analyst consensus for CPG’s outlook.
Valuation: What is CPG 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 CPG 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 pass 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.
