While small-cap stocks, such as XPO Logistics Europe SA (EPA:XPO) with its market cap of €2.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into XPO here.
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XPO’s Debt (And Cash Flows)
XPO's debt level has been constant at around €1.1b over the previous year including long-term debt. At this constant level of debt, XPO's cash and short-term investments stands at €357m , ready to be used for running the business. On top of this, XPO has generated cash from operations of €324m in the last twelve months, resulting in an operating cash to total debt ratio of 29%, meaning that XPO’s debt is appropriately covered by operating cash.
Can XPO meet its short-term obligations with the cash in hand?
With current liabilities at €1.7b, it appears that the company has been able to meet these commitments with a current assets level of €1.9b, leading to a 1.07x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Logistics companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is XPO’s debt level acceptable?
XPO is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if XPO’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 XPO, the ratio of 4.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving XPO ample headroom to grow its debt facilities.
Although XPO’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for XPO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research XPO Logistics Europe to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for XPO’s future growth? Take a look at our free research report of analyst consensus for XPO’s outlook.
- Valuation: What is XPO 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 XPO 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.
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