The size of Capgemini SE (ENXTPA:CAP), a €19.08B large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. This article will examine Capgemini’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CAP here. View our latest analysis for Capgemini
How much cash does CAP generate through its operations?
Over the past year, CAP has maintained its debt levels at around €3.38B made up of current and long term debt. At this current level of debt, CAP’s cash and short-term investments stands at €1.99B , ready to deploy into the business. Moreover, CAP has produced cash from operations of €1.33B during the same period of time, leading to an operating cash to total debt ratio of 39.36%, signalling that CAP’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CAP’s case, it is able to generate 0.39x cash from its debt capital.
Does CAP’s liquid assets cover its short-term commitments?
Looking at CAP’s most recent €4.59B liabilities, it seems that the business has been able to meet these commitments with a current assets level of €6.19B, leading to a 1.35x current account ratio. Usually, for IT 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.
Is CAP’s debt level acceptable?
With debt reaching 48.55% of equity, CAP may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether CAP is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In CAP’s case, the ratio of 73.22x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CAP are considered a risk-averse investment.
CAP’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. Since there is also no concerns around CAP’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CAP has company-specific issues impacting its capital structure decisions. You should continue to research Capgemini to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CAP’s future growth? Take a look at our free research report of analyst consensus for CAP’s outlook.
- Valuation: What is CAP 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 CAP 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 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.