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Does Empire Company Limited’s (TSE:EMP.A) Debt Level Pose A Problem?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Empire Company Limited (TSE:EMP.A), with a market cap of CA$7.0b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine EMP.A’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. Don’t forget that this is a general and concentrated examination of Empire’s financial health, so you should conduct further analysis into EMP.A here.

View our latest analysis for Empire

How does EMP.A’s operating cash flow stack up against its debt?

EMP.A has shrunken its total debt levels in the last twelve months, from CA$1.8b to CA$1.6b – this includes long-term debt. With this reduction in debt, EMP.A’s cash and short-term investments stands at CA$678m , ready to deploy into the business. Moreover, EMP.A has produced CA$861m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 52%, meaning that EMP.A’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EMP.A’s case, it is able to generate 0.52x cash from its debt capital.

Does EMP.A’s liquid assets cover its short-term commitments?

Looking at EMP.A’s CA$3.0b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$2.7b, with a current ratio of 0.89x.

TSX:EMP.A Historical Debt December 14th 18

Can EMP.A service its debt comfortably?

EMP.A is a relatively highly levered company with a debt-to-equity of 42%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether EMP.A is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EMP.A’s, case, the ratio of 4.93x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as EMP.A’s high interest coverage is seen as responsible and safe practice.

Next Steps:

EMP.A’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure EMP.A has company-specific issues impacting its capital structure decisions. I suggest you continue to research Empire to get a more holistic view of the stock by looking at:

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