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Does Rexel SA.’s (EPA:RXL) Debt Level Pose A Problem?

Frank Brewer

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Rexel SA. (ENXTPA:RXL), with a market cap of €3.79B, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. RXL’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into RXL here. View our latest analysis for Rexel

Does RXL generate an acceptable amount of cash through operations?

RXL’s debt levels have fallen from €2.80B to €2.61B over the last 12 months , which is made up of current and long term debt. With this reduction in debt, RXL currently has €563.60M remaining in cash and short-term investments , ready to deploy into the business. On top of this, RXL has generated cash from operations of €290.20M in the last twelve months, leading to an operating cash to total debt ratio of 11.14%, signalling that RXL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RXL’s case, it is able to generate 0.11x cash from its debt capital.

Does RXL’s liquid assets cover its short-term commitments?

At the current liabilities level of €2.93B liabilities, the company has been able to meet these commitments with a current assets level of €4.73B, leading to a 1.61x current account ratio. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ENXTPA:RXL Historical Debt Jun 1st 18

Does RXL face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 61.70%, RXL can be considered as an above-average leveraged 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 RXL’s case, the ratio of 6.24x 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.

Next Steps:

RXL’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. However, the company exhibits proper management of current assets and upcoming liabilities. 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 stock by looking at:

  1. 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.
  2. 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.
  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 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.