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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as LPP SA Capital Group (WSE:LPP), with a market capitalization of zł13b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at LPP’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into LPP here.
Check out our latest analysis for LPP SA Capital Group
LPP’s Debt (And Cash Flows)
LPP's debt levels surged from zł220m to zł3.4b over the last 12 months , which accounts for long term debt. With this rise in debt, LPP currently has zł992m remaining in cash and short-term investments to keep the business going. On top of this, LPP has produced zł1.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 38%, meaning that LPP’s current level of operating cash is high enough to cover debt.
Can LPP pay its short-term liabilities?
With current liabilities at zł2.7b, it appears that the company has been able to meet these commitments with a current assets level of zł2.8b, leading to a 1.03x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Luxury companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LPP service its debt comfortably?
With a debt-to-equity ratio of 14%, LPP's debt level may be seen as prudent. LPP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if LPP’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 LPP, the ratio of 21.2x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
LPP’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for LPP's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research LPP SA Capital Group to get a better picture of the stock by looking at: