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AGL Energy Limited (ASX:AGL): Financial Strength Analysis

Simply Wall St

With a market capitalization of AU$14b, AGL Energy Limited (ASX:AGL) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public 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. Today I will analyse the latest financial data for AGL to determine is solvency and liquidity and whether the stock is a sound investment.

View our latest analysis for AGL Energy

Does AGL Produce Much Cash Relative To Its Debt?

AGL has sustained its debt level by about AU$3.0b over the last 12 months including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at AU$428m to keep the business going. Additionally, AGL has generated cash from operations of AU$2.0b over the same time period, leading to an operating cash to total debt ratio of 66%, indicating that AGL’s debt is appropriately covered by operating cash.

Can AGL meet its short-term obligations with the cash in hand?

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. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Integrated Utilities companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ASX:AGL Historical Debt, March 8th 2019

Can AGL service its debt comfortably?

AGL’s level of debt is appropriate relative to its total equity, at 37%. This range is considered safe as AGL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether AGL is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In AGL’s case, the ratio of 12.76x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like AGL are considered a risk-averse investment.

Next Steps:

AGL has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how AGL has been performing in the past. I suggest you continue to research AGL Energy to get a more holistic view 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.