Yahoo Finance What does Telecom Italia SpA’s (BIT:TIT) Balance Sheet Tell Us About Its Future?
Telecom Italia SpA (BIT:TIT), a large-cap worth €10.70b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. Let’s take a look at Telecom Italia’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into TIT here.
Check out our latest analysis for Telecom Italia
How does TIT’s operating cash flow stack up against its debt?
TIT has shrunken its total debt levels in the last twelve months, from €33.73b to €30.97b , which is made up of current and long term debt. With this reduction in debt, TIT currently has €3.48b remaining in cash and short-term investments for investing into the business. On top of this, TIT has produced €4.84b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 15.6%, indicating that TIT’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TIT’s case, it is able to generate 0.16x cash from its debt capital.
Can TIT pay its short-term liabilities?
Looking at TIT’s most recent €12.67b liabilities, it seems that the business has not been able to meet these commitments with a current assets level of €8.96b, leading to a 0.71x current account ratio. which is under the appropriate industry ratio of 3x.
Does TIT face the risk of succumbing to its debt-load?
With total debt exceeding equities, Telecom Italia is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TIT, the ratio of 3.27x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TIT and other large-cap investments thought to be safe.
Next Steps:
TIT’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how TIT has been performing in the past. I suggest you continue to research Telecom Italia to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TIT’s future growth? Take a look at our free research report of analyst consensus for TIT’s outlook.
Valuation: What is TIT 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 TIT 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.
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.
