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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Heineken N.V. (AMS:HEIA) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. Let’s take a look at Heineken’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 HEIA here.
Does HEIA Produce Much Cash Relative To Its Debt?
HEIA's debt level has been constant at around €15b over the previous year including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €2.9b , ready to be used for running the business. On top of this, HEIA has produced €4.4b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 29%, signalling that HEIA’s operating cash is sufficient to cover its debt.
Can HEIA meet its short-term obligations with the cash in hand?
With current liabilities at €10b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.87x. The current ratio is calculated by dividing current assets by current liabilities.
Can HEIA service its debt comfortably?
HEIA is a relatively highly levered company with a debt-to-equity of 96%. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. The sustainability of HEIA’s debt levels can be assessed by comparing the company’s interest payments to earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For HEIA, the ratio of 7.94x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes HEIA and other large-cap investments thought to be safe.
HEIA’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure HEIA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Heineken to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HEIA’s future growth? Take a look at our free research report of analyst consensus for HEIA’s outlook.
- Valuation: What is HEIA 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 HEIA 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.