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Is AGL Energy Limited (ASX:AGL) As Strong As Its Balance Sheet Indicates?

James Harlett

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Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as AGL Energy Limited (ASX:AGL) with a market-capitalization of AU$14b, rarely draw their attention. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. AGL’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AGL here.

See our latest analysis for AGL Energy

How does AGL’s operating cash flow stack up against its debt?

Over the past year, AGL has maintained its debt levels at around AU$3.0b – this includes long-term debt. At this current level of debt, AGL currently has AU$428m remaining in cash and short-term investments for investing into the business. On top of this, AGL has produced cash from operations of AU$2.0b over the same time period, resulting in an operating cash to total debt ratio of 66%, indicating that AGL’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 AGL’s case, it is able to generate 0.66x cash from its debt capital.

Does AGL’s liquid assets cover its short-term commitments?

Looking at AGL’s AU$2.9b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. Generally, for Integrated Utilities companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ASX:AGL Historical Debt February 11th 19

Is AGL’s debt level acceptable?

With a debt-to-equity ratio of 37%, AGL’s debt level may be seen as prudent. 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 12.76x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as AGL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

AGL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for AGL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research AGL Energy to get a better picture of the stock by looking at:

  1. 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.
  2. 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.
  3. 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 editorial-team@simplywallst.com.