There are a number of reasons that attract investors towards large-cap companies such as Galp Energia, SGPS, S.A. (ELI:GALP), with a market cap of €12b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the health of the financials determines whether the company continues to succeed. Today we will look at Galp Energia SGPS’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into GALP here.
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GALP’s Debt (And Cash Flows)
Over the past year, GALP has ramped up its debt from €3.2b to €4.1b , which accounts for long term debt. With this rise in debt, GALP's cash and short-term investments stands at €1.3b , ready to be used for running the business. Additionally, GALP has produced €1.6b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 39%, indicating that GALP’s debt is appropriately covered by operating cash.
Can GALP pay its short-term liabilities?
With current liabilities at €2.7b, it seems that the business has been able to meet these commitments with a current assets level of €4.4b, leading to a 1.62x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does GALP face the risk of succumbing to its debt-load?
With debt reaching 71% of equity, GALP may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. 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. For GALP, the ratio of 199x suggests that interest is amply covered. Large-cap investments like GALP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
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. I admit this is a fairly basic analysis for GALP's financial health. Other important fundamentals need to be considered alongside. I suggest 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.
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 email@example.com. 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.