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There are a number of reasons that attract investors towards large-cap companies such as Siemens Healthineers AG (ETR:SHL), with a market cap of €35b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. This article will examine Siemens Healthineers’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SHL here.
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Does SHL Produce Much Cash Relative To Its Debt?
SHL has built up its total debt levels in the last twelve months, from €4.2b to €4.5b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €843m , ready to be used for running the business. Moreover, SHL has generated cash from operations of €1.7b in the last twelve months, resulting in an operating cash to total debt ratio of 37%, indicating that SHL’s current level of operating cash is high enough to cover debt.
Can SHL meet its short-term obligations with the cash in hand?
With current liabilities at €5.1b, it seems that the business has been able to meet these obligations given the level of current assets of €6.7b, with a current ratio of 1.31x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Medical Equipment 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 SHL face the risk of succumbing to its debt-load?
SHL is a relatively highly levered company with a debt-to-equity of 51%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if SHL’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 SHL, the ratio of 15.88x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SHL are considered a risk-averse investment.