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There are a number of reasons that attract investors towards large-cap companies such as Atos SE (EPA:ATO), with a market cap of €9.7b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Atos’s financial liquidity and leverage to give you an idea of Atos’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ATO here.
View our latest analysis for Atos
Does ATO Produce Much Cash Relative To Its Debt?
ATO's debt levels surged from €2.0b to €5.4b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €2.5b , ready to be used for running the business. On top of this, ATO has generated €1.1b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 21%, signalling that ATO’s debt is appropriately covered by operating cash.
Can ATO pay its short-term liabilities?
Looking at ATO’s €7.2b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.17x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT 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.
Does ATO face the risk of succumbing to its debt-load?
ATO is a relatively highly levered company with a debt-to-equity of 67%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether ATO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ATO's case, the ratio of 33.78x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ATO and other large-cap investments thought to be safe.