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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Sonae, SGPS, S.A. (ELI:SON), with a market cap of €1.8b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. SON’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Don’t forget that this is a general and concentrated examination of Sonae SGPS’s financial health, so you should conduct further analysis into SON here.
See our latest analysis for Sonae SGPS
Does SON Produce Much Cash Relative To Its Debt?
SON has built up its total debt levels in the last twelve months, from €1.5b to €2.3b , which accounts for long term debt. With this growth in debt, SON’s cash and short-term investments stands at €566m to keep the business going. Moreover, SON has produced cash from operations of €361m over the same time period, leading to an operating cash to total debt ratio of 16%, meaning that SON’s debt is not covered by operating cash.
Can SON meet its short-term obligations with the cash in hand?
Looking at SON’s €2.6b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.67x. The current ratio is the number you get when you divide current assets by current liabilities.
Does SON face the risk of succumbing to its debt-load?
SON is a relatively highly levered company with a debt-to-equity of 72%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SON 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 SON’s, case, the ratio of 4.8x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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SON’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. This is only a rough assessment of financial health, and I’m sure SON has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sonae SGPS to get a better picture of the stock by looking at: