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Stocks with market capitalization between $2B and $10B, such as Solvac S.A. (EBR:SOLV) with a size of €2.4b, do not attract as much attention from the investing community as do the small-caps and large-caps. 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 SOLV’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. Don’t forget that this is a general and concentrated examination of Solvac's financial health, so you should conduct further analysis into SOLV here.
Check out our latest analysis for Solvac
Does SOLV Produce Much Cash Relative To Its Debt?
SOLV's debt level has been constant at around €192m over the previous year – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €1.0m to keep the business going. On top of this, SOLV has produced €116m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 60%, meaning that SOLV’s operating cash is sufficient to cover its debt.
Can SOLV pay its short-term liabilities?
With current liabilities at €60m, it appears that the company may not be able to easily meet these obligations given the level of current assets of €48m, with a current ratio of 0.8x. The current ratio is the number you get when you divide current assets by current liabilities.
Can SOLV service its debt comfortably?
With a debt-to-equity ratio of 5.5%, SOLV's debt level is relatively low. SOLV is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether SOLV is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SOLV's, case, the ratio of 67.25x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SOLV’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SOLV has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But, as shareholders, you should try and determine whether this level of debt is justified for SOLV, especially if meeting short-term obligations could also bring about issues. This is only a rough assessment of financial health, and I'm sure SOLV has company-specific issues impacting its capital structure decisions. I recommend you continue to research Solvac to get a more holistic view of the stock by looking at: