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Mid-caps stocks, like ERG S.p.A. (BIT:ERG) with a market capitalization of €2.6b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine ERG’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 ERG here.
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How much cash does ERG generate through its operations?
ERG has sustained its debt level by about €2.2b over the last 12 months – this includes long-term debt. At this constant level of debt, ERG currently has €775m remaining in cash and short-term investments for investing into the business. On top of this, ERG has produced €302m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 14%, indicating that ERG’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ERG’s case, it is able to generate 0.14x cash from its debt capital.
Does ERG’s liquid assets cover its short-term commitments?
With current liabilities at €387m, it seems that the business has been able to meet these obligations given the level of current assets of €957m, with a current ratio of 2.48x. Generally, for Renewable Energy companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can ERG service its debt comfortably?
ERG 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. 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 ERG’s case, the ratio of 11.17x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ERG ample headroom to grow its debt facilities.