Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Publicis Groupe S.A. (EPA:PUB) a safer option. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Publicis Groupe’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PUB here.

View our latest analysis for Publicis Groupe

Does PUB produce enough cash relative to debt?

PUB has built up its total debt levels in the last twelve months, from €3.2b to €4.9b , which includes long-term debt. With this rise in debt, PUB currently has €1.8b remaining in cash and short-term investments for investing into the business. Moreover, PUB has produced €1.8b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 36%, meaning that PUB’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PUB’s case, it is able to generate 0.36x cash from its debt capital.

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

At the current liabilities level of €13b, the company may not be able to easily meet these obligations given the level of current assets of €12b, with a current ratio of 0.91x.

Does PUB face the risk of succumbing to its debt-load?

With debt reaching 80% of equity, PUB may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether PUB is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For PUB, the ratio of 26.47x suggests that interest is comfortably covered. Large-cap investments like PUB 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 PUB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for PUB’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Publicis Groupe to get a better picture of the stock by looking at:

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

2. Valuation: What is PUB 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 PUB 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.