Mid-caps stocks, like Cineworld Group plc (LSE:CINE) with a market capitalization of £1.64B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. I recommend you look at the following hurdles to assess CINE’s financial health. View our latest analysis for Cineworld Group
Can CINE service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For CINE, the debt-to-equity ratio is 47.43%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. 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 (EBIT) at least three times its interest payments is considered financially sound. CINE’s interest on debt is sufficiently covered by earnings as it sits at around 16.05x. Debtors may be willing to loan the company more money, giving CINE ample headroom to grow its debt facilities.
Does CINE’s liquid assets cover its short-term commitments?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare CINE’s cash and other liquid assets against its upcoming debt. Our analysis shows that CINE is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Next Steps:
Are you a shareholder? Although CINE’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Given that CINE’s financial situation may be different in the future, I suggest assessing market expectations for CINE’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. CINE’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.