Is Deutsche Telekom AG’s (FRA:DTE) Balance Sheet A Threat To Its Future?
Deutsche Telekom AG (FRA:DTE), a large-cap worth €72b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. This article will examine Deutsche Telekom’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DTE here.
View our latest analysis for Deutsche Telekom
How much cash does DTE generate through its operations?
DTE has sustained its debt level by about €61b over the last 12 months including long-term debt. At this stable level of debt, DTE currently has €5.1b remaining in cash and short-term investments for investing into the business. On top of this, DTE has generated cash from operations of €17b during the same period of time, leading to an operating cash to total debt ratio of 28%, indicating that DTE’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 DTE’s case, it is able to generate 0.28x cash from its debt capital.
Can DTE meet its short-term obligations with the cash in hand?
At the current liabilities level of €24b, the company may not be able to easily meet these obligations given the level of current assets of €20b, with a current ratio of 0.83x.
Does DTE face the risk of succumbing to its debt-load?
With total debt exceeding equities, Deutsche Telekom is considered a highly levered company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether DTE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For DTE, the ratio of 5.31x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as DTE is a safe investment.
Next Steps:
Although DTE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure DTE has company-specific issues impacting its capital structure decisions. I suggest you continue to research Deutsche Telekom to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DTE’s future growth? Take a look at our free research report of analyst consensus for DTE’s outlook.
Valuation: What is DTE 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 DTE 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 editorial-team@simplywallst.com.
