In This Article:
There are a number of reasons that attract investors towards large-cap companies such as RELX NV (ENXTAM:REN), with a market cap of €34.94B. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Let’s take a look at RELX’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 REN here. View our latest analysis for RELX
How much cash does REN generate through its operations?
REN’s debt level has been constant at around UK£4.90B over the previous year comprising of short- and long-term debt. At this stable level of debt, REN currently has UK£111.00M remaining in cash and short-term investments for investing into the business. On top of this, REN has generated cash from operations of UK£1.85B over the same time period, resulting in an operating cash to total debt ratio of 37.71%, meaning that REN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In REN’s case, it is able to generate 0.38x cash from its debt capital.
Does REN’s liquid assets cover its short-term commitments?
Looking at REN’s most recent UK£4.53B liabilities, it appears that the company is not able to meet these obligations given the level of current assets of UK£2.16B, with a current ratio of 0.48x below the prudent level of 3x.
Can REN service its debt comfortably?
Considering RELX’s total debt outweighs its equity, the company is deemed highly levered. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if REN’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In REN’s case, the ratio of 11.65x 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 REN are considered a risk-averse investment.