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What does Coca-Cola Amatil Limited’s (ASX:CCL) Balance Sheet Tell Us About Its Future?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Coca-Cola Amatil Limited (ASX:CCL), with a market cap of AU$7.3b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at CCL’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 CCL here.

See our latest analysis for Coca-Cola Amatil

How much cash does CCL generate through its operations?

CCL has built up its total debt levels in the last twelve months, from AU$2.4b to AU$2.5b – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$966m for investing into the business. Additionally, CCL has produced cash from operations of AU$552m over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that CCL’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 CCL’s case, it is able to generate 0.22x cash from its debt capital.

Can CCL pay its short-term liabilities?

With current liabilities at AU$1.5b, it appears that the company has been able to meet these commitments with a current assets level of AU$2.6b, leading to a 1.79x current account ratio. For Beverage companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:CCL Historical Debt November 5th 18

Is CCL’s debt level acceptable?

With total debt exceeding equities, CCL is considered a highly levered 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 CCL’s case, the ratio of 12.84x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CCL ample headroom to grow its debt facilities.

Next Steps:

CCL’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CCL has been performing in the past. I suggest you continue to research Coca-Cola Amatil to get a better picture of the stock by looking at:

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