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Fresenius Medical Care AG & Co. KGaA (ETR:FME): Time For A Financial Health Check

Investors pursuing a solid, dependable stock investment can often be led to Fresenius Medical Care AG & Co. KGaA (ETR:FME), a large-cap worth €18b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Fresenius Medical Care KGaA’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into FME here.

Check out our latest analysis for Fresenius Medical Care KGaA

How much cash does FME generate through its operations?

FME has sustained its debt level by about €7.4b over the last 12 months including long-term debt. At this constant level of debt, FME’s cash and short-term investments stands at €1.8b for investing into the business. Additionally, FME has produced cash from operations of €1.7b during the same period of time, leading to an operating cash to total debt ratio of 24%, signalling that FME’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 FME’s case, it is able to generate 0.24x cash from its debt capital.

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

At the current liabilities level of €6.1b, the company has been able to meet these commitments with a current assets level of €7.5b, leading to a 1.24x current account ratio. Usually, for Healthcare companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

XTRA:FME Historical Debt December 16th 18
XTRA:FME Historical Debt December 16th 18

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

With a debt-to-equity ratio of 60%, FME can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if FME’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 FME, the ratio of 6.43x suggests that interest is appropriately covered. Large-cap investments like FME are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

FME’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how FME has been performing in the past. I recommend you continue to research Fresenius Medical Care KGaA to get a more holistic view of the stock by looking at:

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

  2. Valuation: What is FME 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 FME 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.