Stocks with market capitalization between $2B and $10B, such as Brembo SpA (BIT:BRE) with a size of €3.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. This article will examine BRE’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 BRE here.
How does BRE’s operating cash flow stack up against its debt?
BRE’s debt levels have fallen from €574m to €504m over the last 12 months – this includes long-term debt. With this debt payback, BRE currently has €263m remaining in cash and short-term investments , ready to deploy into the business. Additionally, BRE has generated cash from operations of €375m over the same time period, leading to an operating cash to total debt ratio of 74%, indicating that BRE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BRE’s case, it is able to generate 0.74x cash from its debt capital.
Does BRE’s liquid assets cover its short-term commitments?
At the current liabilities level of €966m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.22x. Generally, for Auto Components companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BRE’s debt level acceptable?
BRE is a relatively highly levered company with a debt-to-equity of 43%. 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 BRE’s case, the ratio of 24.54x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BRE ample headroom to grow its debt facilities.
BRE’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 BRE’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 BRE has been performing in the past. You should continue to research Brembo to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BRE’s future growth? Take a look at our free research report of analyst consensus for BRE’s outlook.
- Valuation: What is BRE 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 BRE is currently mispriced by the market.
- 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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.