Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Swiss Prime Site AG (SWX:SPSN) with a market-capitalization of CHF6.57B, rarely draw their attention. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at SPSN’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SPSN here. View our latest analysis for Swiss Prime Site
Does SPSN generate an acceptable amount of cash through operations?
SPSN has built up its total debt levels in the last twelve months, from CHF4.48B to CHF4.85B – this includes both the current and long-term debt. With this increase in debt, SPSN currently has CHF159.15M remaining in cash and short-term investments for investing into the business. On top of this, SPSN has produced CHF458.09M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.44%, signalling that SPSN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SPSN’s case, it is able to generate 0.094x cash from its debt capital.
Does SPSN’s liquid assets cover its short-term commitments?
With current liabilities at CHF943.32M, it seems that the business is not able to meet these obligations given the level of current assets of CHF333.80M, with a current ratio of 0.35x below the prudent level of 3x.
Is SPSN’s debt level acceptable?
SPSN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SPSN’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 SPSN, the ratio of 5.27x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SPSN ample headroom to grow its debt facilities.
Next Steps:
SPSN’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for SPSN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Swiss Prime Site to get a more holistic view of the stock by looking at: