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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as ENGIE SA (EPA:ENGI) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. Today we will look at ENGIE’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ENGI here.
See our latest analysis for ENGIE
How much cash does ENGI generate through its operations?
Over the past year, ENGI has reduced its debt from €36.22b to €32.58b , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at €12.08b , ready to deploy into the business. On top of this, ENGI has generated cash from operations of €8.88b in the last twelve months, leading to an operating cash to total debt ratio of 27.3%, signalling that ENGI’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 ENGI’s case, it is able to generate 0.27x cash from its debt capital.
Can ENGI pay its short-term liabilities?
At the current liabilities level of €55.98b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.08x. Usually, for Integrated Utilities companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ENGI service its debt comfortably?
With a debt-to-equity ratio of 77.8%, ENGI can be considered as an above-average leveraged company. 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 test if ENGI’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For ENGI, the ratio of 12.92x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like ENGI are considered a risk-averse investment.