Is Axfood AB (publ) (STO:AXFO) As Strong As Its Balance Sheet Indicates?

Simply Wall St

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Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Axfood AB (publ) (STO:AXFO), with a market cap of kr41b, are often out of the spotlight. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. AXFO’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 Axfood's financial health, so you should conduct further analysis into AXFO here.

View our latest analysis for Axfood

Does AXFO Produce Much Cash Relative To Its Debt?

AXFO's debt levels surged from kr700m to kr6.5b over the last 12 months , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at kr483m , ready to be used for running the business. On top of this, AXFO has produced cash from operations of kr2.8b over the same time period, leading to an operating cash to total debt ratio of 43%, signalling that AXFO’s current level of operating cash is high enough to cover debt.

Can AXFO meet its short-term obligations with the cash in hand?

Looking at AXFO’s kr7.9b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of kr5.2b, with a current ratio of 0.66x. The current ratio is calculated by dividing current assets by current liabilities.

OM:AXFO Historical Debt, July 16th 2019

Can AXFO service its debt comfortably?

AXFO’s level of debt is appropriate relative to its total equity, at 20%. This range is considered safe as AXFO is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether AXFO 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 AXFO's, case, the ratio of 71.86x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving AXFO ample headroom to grow its debt facilities.

Next Steps:

AXFO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. But it is still important for shareholders to understand why the company isn't increasing its cheaper cost of capital to fund future growth, especially if meeting short-term obligations could also bring about issues. Keep in mind I haven't considered other factors such as how AXFO has been performing in the past. I recommend you continue to research Axfood to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for AXFO’s future growth? Take a look at our free research report of analyst consensus for AXFO’s outlook.
  2. Valuation: What is AXFO 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 AXFO 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.