There are a number of reasons that attract investors towards large-cap companies such as Spotify Technology SA. (DB:639), with a market cap of €21.01B. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, its financial health remains the key to continued success. Today we will look at Spotify Technology’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 639 here. Check out our latest analysis for Spotify Technology
How does 639’s operating cash flow stack up against its debt?
639’s debt levels have fallen from €1.11B to €945.00M over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, 639’s cash and short-term investments stands at €1.51B for investing into the business. On top of this, 639 has produced cash from operations of €179.00M in the last twelve months, leading to an operating cash to total debt ratio of 18.94%, signalling that 639’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 639’s case, it is able to generate 0.19x cash from its debt capital.
Does 639’s liquid assets cover its short-term commitments?
With current liabilities at €1.86B, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. For Internet companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 639 service its debt comfortably?
Since equity is smaller than total debt levels, Spotify Technology is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. Though, since 639 is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
639’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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 639 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Spotify Technology to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 639’s future growth? Take a look at our free research report of analyst consensus for 639’s outlook.
- Valuation: What is 639 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 639 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.