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Is EssilorLuxottica Société anonyme (EPA:EL) As Strong As Its Balance Sheet Indicates?

Simply Wall St

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With a market capitalization of €44b, EssilorLuxottica Société anonyme (EPA:EL) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for EL to determine is solvency and liquidity and whether the stock is a sound investment.

See our latest analysis for EssilorLuxottica Société anonyme

EL’s Debt (And Cash Flows)

EL's debt levels surged from €1.9b to €3.8b over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €1.8b to keep the business going. Moreover, EL has generated €1.9b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 50%, indicating that EL’s operating cash is sufficient to cover its debt.

Does EL’s liquid assets cover its short-term commitments?

Looking at EL’s €7.0b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €7.0b, with a current ratio of 1x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Luxury companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTPA:EL Historical Debt, June 1st 2019

Is EL’s debt level acceptable?

With debt at 11% of equity, EL may be thought of as appropriately levered. EL is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if EL’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. In EL's case, the ratio of 30.96x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like EL are considered a risk-averse investment.

Next Steps:

EL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure EL has company-specific issues impacting its capital structure decisions. I recommend you continue to research EssilorLuxottica Société anonyme to get a better picture of the stock by looking at:

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