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Does Repsol, S.A.'s (BME:REP) Debt Level Pose A Problem?

Simply Wall St

Repsol, S.A. (BME:REP), a large-cap worth €23b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, its financial health remains the key to continued success. I will provide an overview of Repsol’s financial liquidity and leverage to give you an idea of Repsol’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into REP here.

Check out our latest analysis for Repsol

REP’s Debt (And Cash Flows)

REP has sustained its debt level by about €15b over the last 12 months – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €6.7b , ready to be used for running the business. On top of this, REP has generated €4.6b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 30%, signalling that REP’s debt is appropriately covered by operating cash.

Does REP’s liquid assets cover its short-term commitments?

With current liabilities at €13b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Oil and Gas 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.

BME:REP Historical Debt, April 25th 2019

Is REP’s debt level acceptable?

REP is a relatively highly levered company with a debt-to-equity of 50%. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times REP’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In REP's case, the ratio of 10.86x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as REP is a safe investment.

Next Steps:

REP’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 REP's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for REP's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Repsol to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for REP’s future growth? Take a look at our free research report of analyst consensus for REP’s outlook.
  2. Valuation: What is REP 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 REP is currently mispriced by the market.
  3. 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 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.