Adecco Group AG (VTX:ADEN): Time For A Financial Health Check

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Adecco Group AG (VTX:ADEN) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. This article will examine Adecco Group’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ADEN here.

See our latest analysis for Adecco Group

Does ADEN Produce Much Cash Relative To Its Debt?

Over the past year, ADEN has maintained its debt levels at around €2.2b – this includes long-term debt. At this stable level of debt, ADEN currently has €683m remaining in cash and short-term investments , ready to be used for running the business. Moreover, ADEN has generated cash from operations of €892m during the same period of time, leading to an operating cash to total debt ratio of 40%, signalling that ADEN’s current level of operating cash is high enough to cover debt.

Can ADEN pay its short-term liabilities?

At the current liabilities level of €4.5b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

SWX:ADEN Historical Debt, June 24th 2019

Can ADEN service its debt comfortably?

ADEN is a relatively highly levered company with a debt-to-equity of 48%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus 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 assess the sustainability of ADEN’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In ADEN's case, the ratio of 32.5x suggests that interest is comfortably covered. Large-cap investments like ADEN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although ADEN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ADEN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ADEN's financial health. Other important fundamentals need to be considered alongside. You should continue to research Adecco Group to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ADEN’s future growth? Take a look at our free research report of analyst consensus for ADEN’s outlook.
  2. Valuation: What is ADEN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ADEN is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.