Are Deutsche Wohnen SE's (ETR:DWNI) Interest Costs Too High?
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The size of Deutsche Wohnen SE (ETR:DWNI), a €16b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. Let’s take a look at Deutsche Wohnen’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DWNI here.
See our latest analysis for Deutsche Wohnen
DWNI’s Debt (And Cash Flows)
DWNI's debt levels surged from €7.3b to €9.2b over the last 12 months – this includes long-term debt. With this rise in debt, DWNI's cash and short-term investments stands at €333m , ready to be used for running the business. Moreover, DWNI has produced cash from operations of €469m over the same time period, resulting in an operating cash to total debt ratio of 5.1%, indicating that DWNI’s current level of operating cash is not high enough to cover debt.
Does DWNI’s liquid assets cover its short-term commitments?
At the current liabilities level of €589m, it appears that the company has been able to meet these obligations given the level of current assets of €962m, with a current ratio of 1.63x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is DWNI’s debt level acceptable?
DWNI is a relatively highly levered company with a debt-to-equity of 78%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus 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 DWNI’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For DWNI, the ratio of 5.57x 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 DWNI are considered a risk-averse investment.
Next Steps:
DWNI’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. Keep in mind I haven't considered other factors such as how DWNI has been performing in the past. You should continue to research Deutsche Wohnen to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DWNI’s future growth? Take a look at our free research report of analyst consensus for DWNI’s outlook.
Historical Performance: What has DWNI's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
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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.
