Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
There are a number of reasons that attract investors towards large-cap companies such as SAP SE (FRA:SAP), with a market cap of €132b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of SAP’s financial liquidity and leverage to give you an idea of SAP’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SAP here.
Does SAP Produce Much Cash Relative To Its Debt?
SAP has built up its total debt levels in the last twelve months, from €8.1b to €15b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at €7.9b to keep the business going. On top of this, SAP has generated €4.5b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 31%, meaning that SAP’s operating cash is sufficient to cover its debt.
Can SAP pay its short-term liabilities?
With current liabilities at €15b, it appears that the company has been able to meet these obligations given the level of current assets of €16b, with a current ratio of 1.1x. The current ratio is the number you get when you divide current assets by current liabilities. For Software 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 SAP’s debt level acceptable?
With a debt-to-equity ratio of 50%, SAP can be considered as an above-average leveraged company. 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. 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. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In SAP's case, the ratio of 24.48x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes SAP and other large-cap investments thought to be safe.
SAP’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 SAP'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 SAP has company-specific issues impacting its capital structure decisions. I suggest you continue to research SAP to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SAP’s future growth? Take a look at our free research report of analyst consensus for SAP’s outlook.
- Valuation: What is SAP 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 SAP 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 firstname.lastname@example.org. 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.