Investors pursuing a solid, dependable stock investment can often be led to Proximus PLC (EBR:PROX), a large-cap worth €8.5b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to extending previous success is in the health of the company’s financials. This article will examine Proximus’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PROX here.
Does PROX Produce Much Cash Relative To Its Debt?
PROX has sustained its debt level by about €2.5b over the last 12 months including long-term debt. At this stable level of debt, PROX's cash and short-term investments stands at €344m , ready to be used for running the business. On top of this, PROX has produced cash from operations of €1.6b over the same time period, leading to an operating cash to total debt ratio of 62%, meaning that PROX’s debt is appropriately covered by operating cash.
Can PROX meet its short-term obligations with the cash in hand?
Looking at PROX’s €2.3b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x. The current ratio is the number you get when you divide current assets by current liabilities.
Does PROX face the risk of succumbing to its debt-load?
PROX is a relatively highly levered company with a debt-to-equity of 79%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether PROX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PROX's case, the ratio of 22.39x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like PROX are considered a risk-averse investment.
PROX’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. But, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for PROX's financial health. Other important fundamentals need to be considered alongside. You should continue to research Proximus to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PROX’s future growth? Take a look at our free research report of analyst consensus for PROX’s outlook.
- Valuation: What is PROX 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 PROX 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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