Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Jerónimo Martins SGPS SA (ELI:JMT), with a market capitalization of €7.90b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at JMT’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 JMT here.
Does JMT produce enough cash relative to debt?
Over the past year, JMT has ramped up its debt from €473.0m to €618.2m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at €223.0m , ready to deploy into the business. Additionally, JMT has generated €860.8m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 139%, meaning that JMT’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In JMT’s case, it is able to generate 1.39x cash from its debt capital.
Can JMT meet its short-term obligations with the cash in hand?
With current liabilities at €3.87b, it seems that the business is not able to meet these obligations given the level of current assets of €1.50b, with a current ratio of 0.39x below the prudent level of 3x.
Is JMT’s debt level acceptable?
With debt at 35.1% of equity, JMT may be thought of as appropriately levered. This range is considered safe as JMT is not taking on too much debt obligation, which may be constraining for future growth. We can test if JMT’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 JMT, the ratio of 40.46x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving JMT ample headroom to grow its debt facilities.
JMT’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, 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 JMT has been performing in the past. I suggest you continue to research Jerónimo Martins SGPS to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for JMT’s future growth? Take a look at our free research report of analyst consensus for JMT’s outlook.
- Valuation: What is JMT 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 JMT 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 email@example.com.