Carrefour SA (EPA:CA), a large-cap worth €13b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. This article will examine Carrefour’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CA here.
How much cash does CA generate through its operations?
CA’s debt levels have fallen from €15b to €14b over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €2.1b , ready to deploy into the business. Moreover, CA has produced €3.0b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 21%, indicating that CA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In CA’s case, it is able to generate 0.21x cash from its debt capital.
Can CA meet its short-term obligations with the cash in hand?
At the current liabilities level of €22b, it seems that the business may not be able to easily meet these obligations given the level of current assets of €17b, with a current ratio of 0.77x.
Does CA face the risk of succumbing to its debt-load?
With total debt exceeding equities, Carrefour is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. Though, since CA is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
With a high level of debt on its balance sheet, CA could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for CA to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure CA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Carrefour to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CA’s future growth? Take a look at our free research report of analyst consensus for CA’s outlook.
- Valuation: What is CA 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 CA 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 firstname.lastname@example.org.