Mid-caps stocks, like Interpump Group S.p.A. (BIT:IP) with a market capitalization of €3.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at IP’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into IP here.
IP’s Debt (And Cash Flows)
IP has sustained its debt level by about €405m over the last 12 months which accounts for long term debt. At this stable level of debt, IP currently has €118m remaining in cash and short-term investments , ready to be used for running the business. Moreover, IP has produced €149m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 37%, signalling that IP’s operating cash is sufficient to cover its debt.
Can IP pay its short-term liabilities?
With current liabilities at €446m, the company has been able to meet these obligations given the level of current assets of €791m, with a current ratio of 1.77x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does IP face the risk of succumbing to its debt-load?
IP is a relatively highly levered company with a debt-to-equity of 47%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In IP’s case, the ratio of 77.12x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as IP’s high interest coverage is seen as responsible and safe practice.
IP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for IP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Interpump Group to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IP’s future growth? Take a look at our free research report of analyst consensus for IP’s outlook.
- Valuation: What is IP 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 IP 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.
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