The size of Republic Services, Inc. (NYSE:RSG), a US$23b 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. But, the key to their continued success lies in its financial health. Let’s take a look at Republic Services’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into RSG here.
Does RSG produce enough cash relative to debt?
RSG’s debt levels surged from US$7.9b to US$8.3b over the last 12 months – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$82m , ready to deploy into the business. On top of this, RSG has generated cash from operations of US$2.3b over the same time period, leading to an operating cash to total debt ratio of 28%, signalling that RSG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RSG’s case, it is able to generate 0.28x cash from its debt capital.
Does RSG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$2.7b, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$1.5b, leading to a current ratio of 0.56x.
Does RSG face the risk of succumbing to its debt-load?
Republic Services is a highly levered company given that total debt exceeds equity. 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. 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 RSG’s case, the ratio of 4.25x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes RSG and other large-cap investments thought to be safe.
RSG’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. I admit this is a fairly basic analysis for RSG’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Republic Services to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RSG’s future growth? Take a look at our free research report of analyst consensus for RSG’s outlook.
- Valuation: What is RSG 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 RSG 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.