AGL Energy Limited (ASX:AGL), a large-cap worth AU$14.43b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an adundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for AGL, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
How much cash does AGL generate through its operations?
AGL’s debt levels have fallen from AU$3.70b to AU$2.95b over the last 12 months , which comprises of short- and long-term debt. With this debt payback, AGL currently has AU$83.00m remaining in cash and short-term investments , ready to deploy into the business. Moreover, AGL has produced AU$1.22b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 41.22%, signalling that AGL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In AGL’s case, it is able to generate 0.41x cash from its debt capital.
Can AGL pay its short-term liabilities?
Looking at AGL’s most recent AU$2.53b liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. Usually, for Integrated Utilities companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does AGL face the risk of succumbing to its debt-load?
AGL’s level of debt is appropriate relative to its total equity, at 37.65%. AGL is not taking on too much debt commitment, which may be constraining for future growth. We can test if AGL’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 AGL, the ratio of 9.12x suggests that interest is well-covered. Large-cap investments like AGL are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
AGL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. I admit this is a fairly basic analysis for AGL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research AGL Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AGL’s future growth? Take a look at our free research report of analyst consensus for AGL’s outlook.
- Valuation: What is AGL 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 AGL is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.