E.ON SE (FRA:EOAN), a large-cap worth €21b, 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, the health of the financials determines whether the company continues to succeed. This article will examine E.ON’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 EOAN here.
Does EOAN Produce Much Cash Relative To Its Debt?
EOAN’s debt levels have fallen from €14b to €10.0b over the last 12 months , which includes long-term debt. With this reduction in debt, EOAN currently has €5.7b remaining in cash and short-term investments , ready to be used for running the business. Additionally, EOAN has produced cash from operations of €2.9b over the same time period, resulting in an operating cash to total debt ratio of 29%, signalling that EOAN’s operating cash is sufficient to cover its debt.
Can EOAN meet its short-term obligations with the cash in hand?
At the current liabilities level of €13b, the company has been able to meet these obligations given the level of current assets of €24b, with a current ratio of 1.84x. The current ratio is the number you get when you divide current assets by current liabilities. For Integrated Utilities 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 EOAN’s debt level acceptable?
Since equity is smaller than total debt levels, E.ON is considered to have high leverage. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether EOAN is able to meet its debt obligations by looking at the net interest coverage ratio. 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 EOAN’s case, the ratio of 5.71x suggests that interest is well-covered. Large-cap investments like EOAN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
EOAN’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. Since there is also no concerns around EOAN’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure EOAN has company-specific issues impacting its capital structure decisions. You should continue to research E.ON to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EOAN’s future growth? Take a look at our free research report of analyst consensus for EOAN’s outlook.
- Valuation: What is EOAN 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 EOAN 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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