Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Bechtle AG (ETR:BC8), with a market capitalization of €4.5b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. This article will examine BC8’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into BC8 here.
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BC8’s Debt (And Cash Flows)
Over the past year, BC8 has ramped up its debt from €84m to €392m – this includes long-term debt. With this growth in debt, BC8 currently has €192m remaining in cash and short-term investments , ready to be used for running the business. Moreover, BC8 has generated €104m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 27%, meaning that BC8’s current level of operating cash is high enough to cover debt.
Can BC8 pay its short-term liabilities?
With current liabilities at €667m, the company has been able to meet these obligations given the level of current assets of €1.3b, with a current ratio of 2.02x. The current ratio is calculated by dividing current assets by current liabilities. For IT companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is BC8’s debt level acceptable?
BC8 is a relatively highly levered company with a debt-to-equity of 43%. 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 BC8’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 BC8, the ratio of 76.28x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BC8 ample headroom to grow its debt facilities.
Although BC8’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for BC8's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Bechtle to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BC8’s future growth? Take a look at our free research report of analyst consensus for BC8’s outlook.
- Valuation: What is BC8 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 BC8 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.
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