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Mid-caps stocks, like Lenzing Aktiengesellschaft (WBAG:LNZ) with a market capitalization of €2.52B, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. LNZ’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into LNZ here. Check out our latest analysis for Lenzing
Does LNZ generate an acceptable amount of cash through operations?
LNZ’s debt levels have fallen from €604.55M to €382.60M over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, LNZ’s cash and short-term investments stands at €313.42M for investing into the business. Moreover, LNZ has produced cash from operations of €271.11M over the same time period, resulting in an operating cash to total debt ratio of 70.86%, signalling that LNZ’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 LNZ’s case, it is able to generate 0.71x cash from its debt capital.
Can LNZ meet its short-term obligations with the cash in hand?
At the current liabilities level of €509.55M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €1.05B, with a current ratio of 2.05x. For Chemicals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LNZ service its debt comfortably?
With debt at 25.07% of equity, LNZ may be thought of as appropriately levered. This range is considered safe as LNZ is not taking on too much debt obligation, which may be constraining for future growth. We can test if LNZ’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LNZ, the ratio of 29.75x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as LNZ’s high interest coverage is seen as responsible and safe practice.
Next Steps:
LNZ has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure LNZ has company-specific issues impacting its capital structure decisions. I suggest you continue to research Lenzing to get a better picture of the stock by looking at: