Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as HELLA GmbH & Co KGaA (FRA:HLE), with a market capitalization of €3.9b, rarely draw their attention from the investing community. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Let’s take a look at HLE’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into HLE here.
Does HLE produce enough cash relative to debt?
HLE’s debt level has been constant at around €1.3b over the previous year including long-term debt. At this current level of debt, HLE’s cash and short-term investments stands at €1.0b , ready to deploy into the business. Moreover, HLE has generated €830m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 63%, indicating that HLE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HLE’s case, it is able to generate 0.63x cash from its debt capital.
Can HLE meet its short-term obligations with the cash in hand?
With current liabilities at €1.5b, it appears that the company has been able to meet these commitments with a current assets level of €3.5b, leading to a 2.3x current account ratio. For Auto Components 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.
Is HLE’s debt level acceptable?
With debt reaching 52% of equity, HLE may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if HLE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HLE, the ratio of 18.5x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as HLE’s high interest coverage is seen as responsible and safe practice.
Although HLE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around HLE’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for HLE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research HELLA GmbH KGaA to get a more holistic view of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HLE’s future growth? Take a look at our free research report of analyst consensus for HLE’s outlook.
- Valuation: What is HLE 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 HLE 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.