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Are freenet AG's (FRA:FNTN) Interest Costs Too High?

Simply Wall St

Mid-caps stocks, like freenet AG (FRA:FNTN) with a market capitalization of €2.3b, 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. FNTN’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FNTN here.

Check out our latest analysis for freenet

FNTN’s Debt (And Cash Flows)

FNTN's debt levels surged from €2.0b to €2.3b over the last 12 months , which accounts for long term debt. With this growth in debt, FNTN currently has €227m remaining in cash and short-term investments to keep the business going. On top of this, FNTN has produced cash from operations of €387m over the same time period, resulting in an operating cash to total debt ratio of 17%, indicating that FNTN’s current level of operating cash is not high enough to cover debt.

Can FNTN meet its short-term obligations with the cash in hand?

Looking at FNTN’s €1.1b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of €707m, with a current ratio of 0.67x. The current ratio is calculated by dividing current assets by current liabilities.

DB:FNTN Historical Debt, July 22nd 2019

Can FNTN service its debt comfortably?

FNTN is a highly-leveraged company with debt exceeding equity by over 100%. 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 5.24x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as FNTN’s high interest coverage is seen as responsible and safe practice.

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. Though its lack of liquidity raises questions over current asset management practices for the mid-cap. Keep in mind I haven't considered other factors such as how FNTN has been performing in the past. I suggest you continue to research freenet to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  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.

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 editorial-team@simplywallst.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.