Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as AmRest Holdings SE (WSE:EAT), with a market capitalization of zł8.0b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine EAT’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into EAT here.
How does EAT’s operating cash flow stack up against its debt?
EAT’s debt levels surged from €392m to €492m over the last 12 months , which accounts for long term debt. With this increase in debt, EAT currently has €113m remaining in cash and short-term investments , ready to deploy into the business. Additionally, EAT has produced cash from operations of €175m in the last twelve months, leading to an operating cash to total debt ratio of 35%, meaning that EAT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EAT’s case, it is able to generate 0.35x cash from its debt capital.
Can EAT meet its short-term obligations with the cash in hand?
Looking at EAT’s €201m in current liabilities, the company has been able to meet these obligations given the level of current assets of €201m, with a current ratio of 1x. Generally, for Hospitality companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EAT’s debt level acceptable?
EAT is a highly-leveraged company with debt exceeding equity by over 100%. 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 EAT 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 EAT’s, case, the ratio of 6.4x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
EAT’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. Since there is also no concerns around EAT’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for EAT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research AmRest Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EAT’s future growth? Take a look at our free research report of analyst consensus for EAT’s outlook.
- Valuation: What is EAT 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 EAT 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.
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 email@example.com.