U.S. Markets close in 5 hrs 33 mins

Is Rexel S.A.'s (EPA:RXL) Balance Sheet A Threat To Its Future?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Rexel S.A. (EPA:RXL) is a small-cap stock with a market capitalization of €3.3b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into RXL here.

RXL’s Debt (And Cash Flows)

RXL's debt level has been constant at around €2.6b over the previous year – this includes long-term debt. At this stable level of debt, RXL's cash and short-term investments stands at €545m , ready to be used for running the business. On top of this, RXL has generated cash from operations of €285m in the last twelve months, leading to an operating cash to total debt ratio of 11%, meaning that RXL’s current level of operating cash is not high enough to cover debt.

Can RXL meet its short-term obligations with the cash in hand?

Looking at RXL’s €3.5b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €4.9b, leading to a 1.4x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Trade Distributors 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.

ENXTPA:RXL Historical Debt, May 11th 2019

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

RXL is a relatively highly levered company with a debt-to-equity of 61%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established 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. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RXL's case, the ratio of 7.91x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RXL ample headroom to grow its debt facilities.

Next Steps:

RXL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure RXL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Rexel to get a more holistic view of the small-cap by looking at:

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