Stock Analysis

How Financially Strong Is Telecom Italia SpA (BIT:TIT)?

  •  Updated
BIT:TIT
Source: Shutterstock

There are a number of reasons that attract investors towards large-cap companies such as Telecom Italia SpA (BIT:TIT), with a market cap of €11.02b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. This article will examine Telecom Italia’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TIT here.

See our latest analysis for Telecom Italia

Does TIT produce enough cash relative to debt?

TIT has shrunken its total debt levels in the last twelve months, from €33.73b to €30.97b – this includes both the current and long-term debt. With this reduction in debt, TIT's cash and short-term investments stands at €3.48b , ready to deploy into the business. Additionally, TIT has produced cash from operations of €4.84b in the last twelve months, resulting in an operating cash to total debt ratio of 15.6%, indicating that TIT’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TIT’s case, it is able to generate 0.16x cash from its debt capital.

Does TIT’s liquid assets cover its short-term commitments?

At the current liabilities level of €12.67b liabilities, the company has not been able to meet these commitments with a current assets level of €8.96b, leading to a 0.71x current account ratio. which is under the appropriate industry ratio of 3x.

BIT:TIT Historical Debt September 14th 18
BIT:TIT Historical Debt September 14th 18

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

Since equity is smaller than total debt levels, Telecom Italia is considered to have high leverage. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. 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 TIT’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 TIT, the ratio of 3.27x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like TIT are considered a risk-averse investment.

Next Steps:

With a high level of debt on its balance sheet, TIT could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TIT to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure TIT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Telecom Italia to get a more holistic view of the stock by looking at:

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

Telecom Italia

Telecom Italia S.p.A., together with its subsidiaries, provides fixed and mobile telecommunications services in Italy and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth4
Past Performance0
Financial Health0
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with reasonable growth potential.