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Are Atos SE's (EPA:ATO) Interest Costs Too High?

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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Atos SE (EPA:ATO), with a market cap of €7.8b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine ATO’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. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into ATO here.

Check out our latest analysis for Atos

Does ATO Produce Much Cash Relative To Its Debt?

ATO's debt levels surged from €2.0b to €5.4b over the last 12 months , which includes long-term debt. With this growth in debt, ATO's cash and short-term investments stands at €2.5b , ready to be used for running the business. Additionally, ATO has generated €1.1b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 21%, indicating that ATO’s current level of operating cash is high enough to cover debt.

Can ATO pay its short-term liabilities?

At the current liabilities level of €7.2b, the company has been able to meet these obligations given the level of current assets of €8.4b, with a current ratio of 1.17x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTPA:ATO Historical Debt, June 21st 2019
ENXTPA:ATO Historical Debt, June 21st 2019

Does ATO face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 67%, ATO can be considered as an above-average leveraged company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ATO’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 ATO, the ratio of 33.78x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ATO ample headroom to grow its debt facilities.

Next Steps:

ATO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ATO's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how ATO has been performing in the past. I suggest you continue to research Atos to get a better picture of the mid-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for ATO’s future growth? Take a look at our free research report of analyst consensus for ATO’s outlook.

  2. Valuation: What is ATO worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ATO is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.