Are CRH plc’s (ISE:CRG) Interest Costs Too High?
CRH plc (ISE:CRG), a large-cap worth €23.40B, comes to mind for investors seeking a strong and reliable stock investment. 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. But, the key to extending previous success is in the health of the company’s financials. This article will examine CRH’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CRG here. See our latest analysis for CRH
How much cash does CRG generate through its operations?
CRG has sustained its debt level by about €7.99B over the last 12 months comprising of short- and long-term debt. At this stable level of debt, CRG’s cash and short-term investments stands at €2.13B , ready to deploy into the business. Additionally, CRG has produced cash from operations of €2.19B during the same period of time, leading to an operating cash to total debt ratio of 27.40%, indicating that CRG’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CRG’s case, it is able to generate 0.27x cash from its debt capital.
Can CRG meet its short-term obligations with the cash in hand?
Looking at CRG’s most recent €6.03B liabilities, the company has been able to meet these obligations given the level of current assets of €9.77B, with a current ratio of 1.62x. Generally, for Basic Materials companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CRG service its debt comfortably?
With debt reaching 53.35% of equity, CRG may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can put the sustainability of CRG’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In CRG’s case, the ratio of 6.72x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CRG are considered a risk-averse investment.
Next Steps:
CRG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CRG has company-specific issues impacting its capital structure decisions. You should continue to research CRH to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CRG’s future growth? Take a look at our free research report of analyst consensus for CRG’s outlook.
Valuation: What is CRG 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 CRG 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 pass 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.
