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How Financially Strong Is Iren SpA (BIT:IRE)?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Iren SpA (BIT:IRE), with a market capitalization of €2.6b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at IRE’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into IRE here.

Check out our latest analysis for Iren

Does IRE produce enough cash relative to debt?

IRE has built up its total debt levels in the last twelve months, from €3.2b to €3.6b – this includes long-term debt. With this increase in debt, IRE’s cash and short-term investments stands at €1.0b for investing into the business. On top of this, IRE has produced €799m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that IRE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In IRE’s case, it is able to generate 0.22x cash from its debt capital.

Can IRE pay its short-term liabilities?

With current liabilities at €1.5b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.54x. Usually, for Integrated Utilities companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

BIT:IRE Historical Debt November 20th 18

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

Since total debt levels have outpaced equities, IRE is a highly 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 IRE’s case, the ratio of 10.13x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as IRE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although IRE’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. Since there is also no concerns around IRE’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for IRE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Iren to get a better picture of the mid-cap by looking at:

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