There are a number of reasons that attract investors towards large-cap companies such as Atos SE (EPA:ATO), with a market cap of €9.7b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Atos’s financial liquidity and leverage to give you an idea of Atos’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ATO here.

View our latest analysis for Atos

Does ATO Produce Much Cash Relative To Its Debt?

ATO's debt levels surged from €2.0b to €5.4b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €2.5b , ready to be used for running the business. On top of this, ATO has generated €1.1b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 21%, signalling that ATO’s debt is appropriately covered by operating cash.

Can ATO pay its short-term liabilities?

Looking at ATO’s €7.2b 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 1.17x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT 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.

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

ATO is a relatively highly levered company with a debt-to-equity of 67%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. 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 ATO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ATO's case, the ratio of 33.78x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes ATO and other large-cap investments thought to be safe.

Next Steps:

ATO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure ATO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Atos to get a more holistic view of the stock by looking at:

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

2. Valuation: What is ATO 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 ATO 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.