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There are a number of reasons that attract investors towards large-cap companies such as Adecco Group AG (VTX:ADEN), with a market cap of CHF9.7b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Let’s take a look at Adecco Group’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 ADEN here.
See our latest analysis for Adecco Group
ADEN’s Debt (And Cash Flows)
Over the past year, ADEN has maintained its debt levels at around €2.2b including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at €683m to keep the business going. Additionally, ADEN has produced €892m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 40%, signalling that ADEN’s operating cash is sufficient to cover its debt.
Does ADEN’s liquid assets cover its short-term commitments?
With current liabilities at €4.5b, it appears that the company has been able to meet these obligations given the level of current assets of €5.4b, with a current ratio of 1.2x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Professional Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is ADEN’s debt level acceptable?
ADEN is a relatively highly levered company with a debt-to-equity of 48%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if ADEN’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For ADEN, the ratio of 32.5x suggests that interest is comfortably covered. Large-cap investments like ADEN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.