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 €9.33b, rarely draw their attention. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. EAT’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into EAT here. See our latest analysis for AmRest Holdings
Does EAT produce enough cash relative to debt?
EAT’s debt levels surged from €323.72m to €472.80m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, EAT currently has €118.50m remaining in cash and short-term investments for investing into the business. On top of this, EAT has produced cash from operations of €160.61m in the last twelve months, leading to an operating cash to total debt ratio of 33.97%, signalling 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 0.34x cash from its debt capital.
Does EAT’s liquid assets cover its short-term commitments?
At the current liabilities level of €212.10m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of €209.30m, with a current ratio of 0.99x below the prudent level of 3x.
Can EAT service its debt comfortably?
With total debt exceeding equities, EAT is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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 6.12x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EAT ample headroom to grow its debt facilities.
Although EAT’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 lack of liquidity raises questions over current asset management practices for the mid-cap. 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 stock 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.