Investors pursuing a solid, dependable stock investment can often be led to Abertis Infraestructuras SA. (BME:ABE), a large-cap worth €16.59B. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Abertis Infraestructuras’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into ABE here. See our latest analysis for Abertis Infraestructuras

Does ABE produce enough cash relative to debt?

ABE has sustained its debt level by about €18.84B over the last 12 months comprising of short- and long-term debt. At this stable level of debt, ABE’s cash and short-term investments stands at €2.56B , ready to deploy into the business. Additionally, ABE has produced cash from operations of €2.39B during the same period of time, leading to an operating cash to total debt ratio of 12.69%, meaning that ABE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ABE’s case, it is able to generate 0.13x cash from its debt capital.

Can ABE pay its short-term liabilities?

With current liabilities at €3.85B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.46x. Usually, for Infrastructure companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can ABE service its debt comfortably?

With total debt exceeding equities, Abertis Infraestructuras is considered a highly levered company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if ABE’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For ABE, the ratio of 2.64x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Abertis Infraestructuras defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.