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Are Smurfit Kappa Group plc’s (ISE:SK3) Interest Costs Too High?

Stocks with market capitalization between $2B and $10B, such as Smurfit Kappa Group plc (ISE:SK3) with a size of €8.14B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Let’s take a look at SK3’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into SK3 here. See our latest analysis for Smurfit Kappa Group

Does SK3 generate an acceptable amount of cash through operations?

SK3 has sustained its debt level by about €3.34B over the last 12 months made up of current and long term debt. At this current level of debt, SK3’s cash and short-term investments stands at €530.00M for investing into the business. Moreover, SK3 has produced €743.00M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 22.22%, indicating that SK3’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SK3’s case, it is able to generate 0.22x cash from its debt capital.

Can SK3 pay its short-term liabilities?

Looking at SK3’s most recent €2.52B liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €2.96B, with a current ratio of 1.17x. Generally, for Packaging companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ISE:SK3 Historical Debt Mar 22nd 18
ISE:SK3 Historical Debt Mar 22nd 18

Can SK3 service its debt comfortably?

Since total debt levels have outpaced equities, SK3 is a highly leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In SK3’s case, the ratio of 4.71x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SK3’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SK3’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how SK3 has been performing in the past. I suggest you continue to research Smurfit Kappa Group to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SK3’s future growth? Take a look at our free research report of analyst consensus for SK3’s outlook.

  2. Valuation: What is SK3 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 SK3 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.


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.

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