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Investors pursuing a solid, dependable stock investment can often be led to Aéroports de Paris SA (EPA:ADP), a large-cap worth €16b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. This article will examine Aéroports de Paris’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 ADP here.
Does ADP Produce Much Cash Relative To Its Debt?
ADP has built up its total debt levels in the last twelve months, from €6.0b to €7.2b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at €2.2b , ready to be used for running the business. On top of this, ADP has generated €1.6b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 22%, indicating that ADP’s operating cash is sufficient to cover its debt.
Can ADP meet its short-term obligations with the cash in hand?
With current liabilities at €2.6b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Infrastructure companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ADP’s debt level acceptable?
With total debt exceeding equities, Aéroports de Paris is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of ADP’s debt levels to the test by looking at how well interest payments are covered by earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In ADP's case, the ratio of 5.78x suggests that interest is well-covered. Large-cap investments like ADP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
At its current level of cash flow coverage, ADP has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure ADP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Aéroports de Paris to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ADP’s future growth? Take a look at our free research report of analyst consensus for ADP’s outlook.
- Valuation: What is ADP 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 ADP 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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If you spot an error that warrants correction, please contact the editor at email@example.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.