Stock Analysis

Does Capgemini SE's (EPA:CAP) Debt Level Pose A Problem?

ENXTPA:CAP
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Capgemini SE (EPA:CAP), a large-cap worth €16b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at Capgemini’s leverage and assess its financial strength 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 high-level overview, so I encourage you to look further into CAP here.

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How much cash does CAP generate through its operations?

Over the past year, CAP has ramped up its debt from €3.5b to €4.2b , which accounts for long term debt. With this increase in debt, CAP's cash and short-term investments stands at €1.8b , ready to deploy into the business. On top of this, CAP has generated cash from operations of €1.3b during the same period of time, resulting in an operating cash to total debt ratio of 31%, indicating that CAP’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 CAP’s case, it is able to generate 0.31x cash from its debt capital.

Can CAP pay its short-term liabilities?

At the current liabilities level of €4.5b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.32x. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTPA:CAP Historical Debt February 8th 19
ENXTPA:CAP Historical Debt February 8th 19

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

With debt reaching 60% of equity, CAP may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if CAP’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In CAP's case, the ratio of 63.1x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CAP are considered a risk-averse investment.

Next Steps:

Although CAP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how CAP has been performing in the past. You should continue to research Capgemini to get a more holistic view of the large-cap by looking at:

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

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

About ENXTPA:CAP

Capgemini

Provides consulting, digital transformation, technology, and engineering services primarily in North America, France, the United Kingdom, Ireland, the rest of Europe, the Asia-Pacific, and Latin America.

Very undervalued with excellent balance sheet and pays a dividend.

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