Is ISS A/S (CPH:ISS) A Financially Sound Company?

Stocks with market capitalization between $2B and $10B, such as ISS A/S (CPH:ISS) with a size of ø35b, 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. ISS’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 ISS’s financial health, so you should conduct further analysis into ISS here.

View our latest analysis for ISS

Does ISS Produce Much Cash Relative To Its Debt?

ISS's debt level has been constant at around ø18b over the previous year including long-term debt. At this stable level of debt, ISS's cash and short-term investments stands at ø6.8b , ready to be used for running the business. Moreover, ISS has produced ø3.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 19%, signalling that ISS’s debt is not covered by operating cash.

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

At the current liabilities level of ø18b, it seems that the business has been able to meet these obligations given the level of current assets of ø23b, with a current ratio of 1.31x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Commercial Services 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.

CPSE:ISS Historical Debt, July 22nd 2019
CPSE:ISS Historical Debt, July 22nd 2019

Can ISS service its debt comfortably?

Since total debt growth have outpaced equity growth, ISS is a highly leveraged company. 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 ISS 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 ISS's, case, the ratio of 10.05x suggests that interest is comfortably 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.

Next Steps:

Although ISS’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 ISS's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ISS has company-specific issues impacting its capital structure decisions. I suggest you continue to research ISS to get a better picture of the mid-cap by looking at:

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

  2. Valuation: What is ISS 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 ISS 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.