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Mid-caps stocks, like Umicore SA (EBR:UMI) with a market capitalization of €7.8b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. UMI’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into UMI here.
Does UMI Produce Much Cash Relative To Its Debt?
UMI has built up its total debt levels in the last twelve months, from €1.0b to €1.1b , which accounts for long term debt. With this increase in debt, UMI's cash and short-term investments stands at €285m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of UMI’s operating efficiency ratios such as ROA here.
Does UMI’s liquid assets cover its short-term commitments?
With current liabilities at €2.2b, it appears that the company has been able to meet these obligations given the level of current assets of €3.8b, with a current ratio of 1.72x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can UMI service its debt comfortably?
With debt reaching 43% of equity, UMI may be thought of as relatively highly levered. 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 UMI’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 UMI, the ratio of 17.43x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
UMI’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. I admit this is a fairly basic analysis for UMI's financial health. Other important fundamentals need to be considered alongside. You should continue to research Umicore to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UMI’s future growth? Take a look at our free research report of analyst consensus for UMI’s outlook.
- Valuation: What is UMI 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 UMI 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.
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 firstname.lastname@example.org. 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.