Is freenet AG’s (FRA:FNTN) Balance Sheet Strong Enough To Weather A Storm?
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Mid-caps stocks, like freenet AG (FRA:FNTN) with a market capitalization of €2.4b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at FNTN’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into FNTN here.
View our latest analysis for freenet
How much cash does FNTN generate through its operations?
FNTN’s debt levels surged from €1.7b to €2.0b over the last 12 months – this includes long-term debt. With this increase in debt, FNTN currently has €551m remaining in cash and short-term investments , ready to deploy into the business. Moreover, FNTN has generated €361m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 18%, indicating that FNTN’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FNTN’s case, it is able to generate 0.18x cash from its debt capital.
Can FNTN pay its short-term liabilities?
Looking at FNTN’s €988m in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of €860m, with a current ratio of 0.87x.
Can FNTN service its debt comfortably?
Since total debt levels have outpaced equities, FNTN is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if FNTN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For FNTN, the ratio of 6.48x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving FNTN ample headroom to grow its debt facilities.
Next Steps:
Although FNTN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I’m sure FNTN has company-specific issues impacting its capital structure decisions. I recommend you continue to research freenet to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for FNTN’s future growth? Take a look at our free research report of analyst consensus for FNTN’s outlook.
Valuation: What is FNTN 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 FNTN 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 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.
