Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like easyJet plc (LSE:EZJ), with a market cap of £6.05B, are often out of the spotlight. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Today we will look at EZJ’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into EZJ here. View our latest analysis for easyJet
How does EZJ’s operating cash flow stack up against its debt?
Over the past year, EZJ has ramped up its debt from £756.0M to £971.0M – this includes both the current and long-term debt. With this increase in debt, EZJ currently has £1,328.0M remaining in cash and short-term investments , ready to deploy into the business. Moreover, EZJ has produced cash from operations of £877.0M during the same period of time, resulting in an operating cash to total debt ratio of 90.32%, meaning that EZJ’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EZJ’s case, it is able to generate 0.9x cash from its debt capital.
Does EZJ’s liquid assets cover its short-term commitments?
Looking at EZJ’s most recent £1,670.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of £1,734.0M, leading to a 1.04x current account ratio. Usually, for Airlines companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does EZJ face the risk of succumbing to its debt-load?
EZJ’s level of debt is appropriate relative to its total equity, at 34.65%. EZJ is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if EZJ’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 EZJ, the ratio of 20.57x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as EZJ’s high interest coverage is seen as responsible and safe practice.
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EZJ’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for EZJ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research easyJet to get a more holistic view of the stock by looking at: