Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Compagnie de Saint-Gobain SA (EPA:SGO) a safer option. 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. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Compagnie de Saint-Gobain’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 SGO here.
Does SGO produce enough cash relative to debt?
SGO has built up its total debt levels in the last twelve months, from €9.7b to €11.5b , which is made up of current and long term debt. With this increase in debt, SGO currently has €2.2b remaining in cash and short-term investments , ready to deploy into the business. Additionally, SGO has generated cash from operations of €2.3b during the same period of time, resulting in an operating cash to total debt ratio of 20%, signalling that SGO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SGO’s case, it is able to generate 0.2x cash from its debt capital.
Can SGO pay its short-term liabilities?
Looking at SGO’s most recent €13.7b liabilities, it appears that the company has been able to meet these commitments with a current assets level of €17.3b, leading to a 1.27x current account ratio. Usually, for Building 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.
Does SGO face the risk of succumbing to its debt-load?
With debt reaching 60% of equity, SGO may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because 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 SGO’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. In SGO’s case, the ratio of 11.23x 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 SGO are considered a risk-averse investment.
SGO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 SGO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Compagnie de Saint-Gobain to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SGO’s future growth? Take a look at our free research report of analyst consensus for SGO’s outlook.
- Valuation: What is SGO 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 SGO 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.