Does Meliá Hotels International SA.’s (BME:MEL) Debt Level Pose A Problem?

Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Meliá Hotels International SA. (BME:MEL), with a market cap of €2.68B, are often out of the spotlight. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Today we will look at MEL’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. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into MEL here. See our latest analysis for Meliá Hotels International

Does MEL generate enough cash through operations?

MEL’s debt level has been constant at around €932.63M over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €336.19M , ready to deploy into the business. Moreover, MEL has produced cash from operations of €259.42M in the last twelve months, resulting in an operating cash to total debt ratio of 27.82%, indicating that MEL’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 MEL’s case, it is able to generate 0.28x cash from its debt capital.

Can MEL meet its short-term obligations with the cash in hand?

At the current liabilities level of €806.64M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.93x, which is below the prudent industry ratio of 3x.

BME:MEL Historical Debt May 17th 18
BME:MEL Historical Debt May 17th 18

Does MEL face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 61.25%, MEL can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether MEL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MEL’s, case, the ratio of 9.82x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MEL ample headroom to grow its debt facilities.

Next Steps:

Although MEL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure MEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Meliá Hotels International to get a better picture of the stock by looking at:

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