Investors pursuing a solid, dependable stock investment can often be led to Galp Energia SGPS SA (ELI:GALP), a large-cap worth €12.4b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Galp Energia SGPS’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 GALP here.
Does GALP produce enough cash relative to debt?
GALP has built up its total debt levels in the last twelve months, from €3.0b to €3.4b , which comprises of short- and long-term debt. With this growth in debt, GALP’s cash and short-term investments stands at €1.5b for investing into the business. On top of this, GALP has generated cash from operations of €1.6b during the same period of time, resulting in an operating cash to total debt ratio of 47%, signalling that GALP’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In GALP’s case, it is able to generate 0.47x cash from its debt capital.
Can GALP pay its short-term liabilities?
At the current liabilities level of €2.9b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.77x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is GALP’s debt level acceptable?
With debt reaching 56% of equity, GALP may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus 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 test if GALP’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In GALP’s case, the ratio of 230x 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 GALP is a safe investment.
Although GALP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure GALP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Galp Energia SGPS to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for GALP’s future growth? Take a look at our free research report of analyst consensus for GALP’s outlook.
- Valuation: What is GALP 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 GALP 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 email@example.com.