Are Interpump Group S.p.A.'s (BIT:IP) Interest Costs Too High?
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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Interpump Group S.p.A. (BIT:IP), with a market capitalization of €2.7b, rarely draw their attention from the investing community. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. IP’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into IP here.
Check out our latest analysis for Interpump Group
IP’s Debt (And Cash Flows)
IP's debt levels surged from €433m to €486m over the last 12 months , which accounts for long term debt. With this rise in debt, IP currently has €105m remaining in cash and short-term investments to keep the business going. On top of this, IP has generated cash from operations of €139m in the last twelve months, resulting in an operating cash to total debt ratio of 29%, indicating that IP’s debt is appropriately covered by operating cash.
Can IP pay its short-term liabilities?
Looking at IP’s €489m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.72x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can IP service its debt comfortably?
With debt reaching 53% of equity, IP may be thought of as relatively highly levered. 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 IP’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 IP, the ratio of 68.35x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IP ample headroom to grow its debt facilities.
Next Steps:
IP’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. Since there is also no concerns around IP's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how IP has been performing in the past. I suggest you continue to research Interpump Group to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IP’s future growth? Take a look at our free research report of analyst consensus for IP’s outlook.
Valuation: What is IP 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 IP is currently mispriced by the market.
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.
