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Is HeidelbergCement AG’s (FRA:HEI) Balance Sheet A Threat To Its Future?

Ricardo Crouch

HeidelbergCement AG (FRA:HEI), a large-cap worth €13.62b, 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, the health of the financials determines whether the company continues to succeed. This article will examine HeidelbergCement’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HEI here.

View our latest analysis for HeidelbergCement

How much cash does HEI generate through its operations?

HEI has sustained its debt level by about €11.59b over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, HEI currently has €1.59b remaining in cash and short-term investments , ready to deploy into the business. On top of this, HEI has produced €1.94b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 16.74%, signalling that HEI’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In HEI’s case, it is able to generate 0.17x cash from its debt capital.

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

With current liabilities at €6.78b, the company has been able to meet these obligations given the level of current assets of €6.99b, with a current ratio of 1.03x. Generally, for Basic Materials companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

DB:HEI Historical Debt August 17th 18

Is HEI’s debt level acceptable?

With debt reaching 72.57% of equity, HEI may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether HEI is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For HEI, the ratio of 5.6x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as HEI is a safe investment.

Next Steps:

At its current level of cash flow coverage, HEI has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. I admit this is a fairly basic analysis for HEI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research HeidelbergCement to get a better picture of the stock by looking at:

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

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 editorial-team@simplywallst.com.