Does Danone S.A.'s (EPA:BN) Debt Level Pose A Problem?
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There are a number of reasons that attract investors towards large-cap companies such as Danone S.A. (EPA:BN), with a market cap of €49b. 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 health of the financials determines whether the company continues to succeed. Let’s take a look at Danone’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into BN here.
Check out our latest analysis for Danone
Does BN Produce Much Cash Relative To Its Debt?
BN's debt levels have fallen from €20b to €18b over the last 12 months , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at €5.0b , ready to be used for running the business. Moreover, BN has generated cash from operations of €3.1b over the same time period, leading to an operating cash to total debt ratio of 17%, meaning that BN’s current level of operating cash is not high enough to cover debt.
Can BN meet its short-term obligations with the cash in hand?
Looking at BN’s €10.0b in current liabilities, the company has been able to meet these commitments with a current assets level of €10b, leading to a 1.04x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Food companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can BN service its debt comfortably?
With total debt exceeding equities, Danone is considered a highly levered company. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if BN’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In BN's case, the ratio of 17.8x 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 BN are considered a risk-averse investment.
Next Steps:
At its current level of cash flow coverage, BN has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure BN has company-specific issues impacting its capital structure decisions. I recommend you continue to research Danone to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for BN’s future growth? Take a look at our free research report of analyst consensus for BN’s outlook.
Valuation: What is BN 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 BN 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.
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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.
