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Orange S.A. (EPA:ORA): Time For A Financial Health Check

Simply Wall St

Investors pursuing a solid, dependable stock investment can often be led to Orange S.A. (EPA:ORA), a large-cap worth €38b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, its financial health remains the key to continued success. This article will examine Orange’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 ORA here.

View our latest analysis for Orange

Does ORA Produce Much Cash Relative To Its Debt?

ORA has sustained its debt level by about €35b over the last 12 months including long-term debt. At this constant level of debt, ORA currently has €8.6b remaining in cash and short-term investments to keep the business going. On top of this, ORA has produced €9.5b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 27%, indicating that ORA’s operating cash is sufficient to cover its debt.

Can ORA pay its short-term liabilities?

Looking at ORA’s €30b in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.72x. The current ratio is the number you get when you divide current assets by current liabilities.

ENXTPA:ORA Historical Debt, March 19th 2019

Does ORA face the risk of succumbing to its debt-load?

Considering Orange’s total debt outweighs its equity, the company is deemed highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In ORA’s case, the ratio of 3.54x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ORA are considered a risk-averse investment.

Next Steps:

ORA’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for ORA’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Orange to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ORA’s future growth? Take a look at our free research report of analyst consensus for ORA’s outlook.
  2. Valuation: What is ORA 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 ORA 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.