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Does B&M European Value Retail S.A.’s (LON:BME) Debt Level Pose A Problem?

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Mid-caps stocks, like B&M European Value Retail S.A. (LON:BME) with a market capitalization of UK£3.3b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at BME’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 BME here.

View our latest analysis for B&M European Value Retail

How much cash does BME generate through its operations?

BME’s debt level has been constant at around UK£648m over the previous year which accounts for long term debt. At this constant level of debt, BME’s cash and short-term investments stands at UK£65m for investing into the business. On top of this, BME has generated cash from operations of UK£221m in the last twelve months, leading to an operating cash to total debt ratio of 34%, signalling that BME’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BME’s case, it is able to generate 0.34x cash from its debt capital.

Can BME meet its short-term obligations with the cash in hand?

Looking at BME’s UK£460m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. Generally, for Multiline Retail companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:BME Historical Debt February 8th 19
LSE:BME Historical Debt February 8th 19

Can BME service its debt comfortably?

BME is a relatively highly levered company with a debt-to-equity of 66%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether BME is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BME’s, case, the ratio of 12.08x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving BME ample headroom to grow its debt facilities.

Next Steps:

BME’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how BME has been performing in the past. I suggest you continue to research B&M European Value Retail 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 BME’s future growth? Take a look at our free research report of analyst consensus for BME’s outlook.

  2. Valuation: What is BME 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 BME 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.

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 editorial-team@simplywallst.com.