There are a number of reasons that attract investors towards large-cap companies such as Proximus PLC (EBR:PROX), with a market cap of €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. But, the key to their continued success lies in its financial health. I will provide an overview of Proximus’s financial liquidity and leverage to give you an idea of Proximus’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PROX here.
Does PROX Produce Much Cash Relative To Its Debt?
PROX’s debt level has been constant at around €2.5b over the previous year – this includes long-term debt. At this current level of debt, PROX’s cash and short-term investments stands at €344m , ready to be used for running the business. Additionally, PROX has produced €1.6b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 62%, meaning that PROX’s debt is appropriately covered by operating cash.
Can PROX pay its short-term liabilities?
Looking at PROX’s €2.3b in current liabilities, it seems that the business 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 calculated by dividing current assets by current liabilities.
Is PROX’s debt level acceptable?
With a debt-to-equity ratio of 79%, PROX can be considered as an above-average leveraged 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can assess the sustainability of PROX’s debt levels to the test by looking at how well interest payments are covered by earnings. 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 amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes PROX and other large-cap investments thought to be safe.
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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how PROX has been performing in the past. I recommend you 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.
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 firstname.lastname@example.org. 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.