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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as A2A SpA (BIT:A2A), with a market capitalization of €4.96b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at A2A’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 information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into A2A here.
Check out our latest analysis for A2A
How does A2A’s operating cash flow stack up against its debt?
Over the past year, A2A has maintained its debt levels at around €3.92b – this includes both the current and long-term debt. At this current level of debt, A2A currently has €865.00m remaining in cash and short-term investments , ready to deploy into the business. Additionally, A2A has generated €1.04b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 26.46%, indicating that A2A’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In A2A’s case, it is able to generate 0.26x cash from its debt capital.
Can A2A pay its short-term liabilities?
Looking at A2A’s most recent €2.20b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.39x. For Integrated Utilities companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does A2A face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, A2A is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 A2A’s case, the ratio of 6.81x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as A2A’s high interest coverage is seen as responsible and safe practice.