Investors pursuing a solid, dependable stock investment can often be led to Evonik Industries AG (FRA:EVK), a large-cap worth €12b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, its financial health remains the key to continued success. Let’s take a look at Evonik Industries’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into EVK here.
Does EVK produce enough cash relative to debt?
EVK’s debt level has been constant at around €3.9b over the previous year – this includes long-term debt. At this current level of debt, EVK currently has €883m remaining in cash and short-term investments for investing into the business. Additionally, EVK has produced cash from operations of €1.7b during the same period of time, leading to an operating cash to total debt ratio of 42%, signalling that EVK’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EVK’s case, it is able to generate 0.42x cash from its debt capital.
Can EVK pay its short-term liabilities?
Looking at EVK’s €3.2b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.75x. For Chemicals 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.
Does EVK face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 50%, EVK can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For EVK, the ratio of 10.46x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes EVK and other large-cap investments thought to be safe.
EVK’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 EVK’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 EVK has company-specific issues impacting its capital structure decisions. You should continue to research Evonik Industries to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EVK’s future growth? Take a look at our free research report of analyst consensus for EVK’s outlook.
- Valuation: What is EVK 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 EVK 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.