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Stocks with market capitalization between $2B and $10B, such as Rexel S.A. (EPA:RXL) with a size of €3.2b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at RXL’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into RXL here.
Does RXL Produce Much Cash Relative To Its Debt?
RXL's debt level has been constant at around €2.6b over the previous year which accounts for long term debt. At this constant level of debt, RXL's cash and short-term investments stands at €545m to keep the business going. Moreover, RXL has produced €285m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 11%, meaning that RXL’s debt is not covered by operating cash.
Can RXL pay its short-term liabilities?
Looking at RXL’s €3.5b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €4.9b, with a current ratio of 1.4x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Trade Distributors companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can RXL service its debt comfortably?
With debt reaching 61% of equity, RXL may be thought of as relatively highly levered. 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 RXL 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 RXL's, case, the ratio of 7.91x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as RXL’s high interest coverage is seen as responsible and safe practice.
Although RXL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure RXL has company-specific issues impacting its capital structure decisions. I recommend you continue to research Rexel to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RXL’s future growth? Take a look at our free research report of analyst consensus for RXL’s outlook.
- Valuation: What is RXL 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 RXL 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 email@example.com. 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.