What You Must Know About XPO Logistics Europe SA’s (EPA:XPO) Financial Strength
Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like XPO Logistics Europe SA (EPA:XPO), with a market cap of €2.88b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. Let’s take a look at XPO’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into XPO here. See our latest analysis for XPO Logistics Europe
Does XPO produce enough cash relative to debt?
Over the past year, XPO has maintained its debt levels at around €1.14b – this includes both the current and long-term debt. At this current level of debt, XPO’s cash and short-term investments stands at €226.03m , ready to deploy into the business. On top of this, XPO has generated cash from operations of €306.67m during the same period of time, leading to an operating cash to total debt ratio of 26.85%, meaning that XPO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In XPO’s case, it is able to generate 0.27x cash from its debt capital.
Can XPO pay its short-term liabilities?
At the current liabilities level of €1.75b liabilities, the company has not been able to meet these commitments with a current assets level of €1.73b, leading to a 0.99x current account ratio. which is under the appropriate industry ratio of 3x.
Does XPO face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, XPO 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. We can check to see whether XPO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In XPO’s, case, the ratio of 4.16x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although XPO’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 XPO has company-specific issues impacting its capital structure decisions. I recommend you continue to research XPO Logistics Europe to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for XPO’s future growth? Take a look at our free research report of analyst consensus for XPO’s outlook.
Valuation: What is XPO 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 XPO 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 pass 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.
