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Investors pursuing a solid, dependable stock investment can often be led to Duke Energy Corporation (NYSE:DUK), a large-cap worth US$63b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Duke Energy’s financial liquidity and leverage to give you an idea of Duke Energy’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 DUK here.
DUK’s Debt (And Cash Flows)
Over the past year, DUK has ramped up its debt from US$56b to US$61b , which accounts for long term debt. With this increase in debt, DUK's cash and short-term investments stands at US$379m to keep the business going. On top of this, DUK has generated US$7.0b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 12%, signalling that DUK’s operating cash is less than its debt.
Can DUK meet its short-term obligations with the cash in hand?
Looking at DUK’s US$12b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$9.2b, with a current ratio of 0.75x. The current ratio is the number you get when you divide current assets by current liabilities.
Can DUK service its debt comfortably?
Considering Duke Energy’s total debt outweighs its equity, the company is deemed highly levered. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. The sustainability of DUK’s debt levels can be assessed by comparing the company’s interest payments to earnings. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In DUK's case, the ratio of 2.54x suggests that interest is not strongly covered. Although it is highly unlikely we'd see Duke Energy defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.
DUK’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure DUK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Duke Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for DUK’s future growth? Take a look at our free research report of analyst consensus for DUK’s outlook.
- Valuation: What is DUK 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 DUK 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.