What You Must Know About Siemens Healthineers AG’s (ETR:SHL) Financial Strength
There are a number of reasons that attract investors towards large-cap companies such as Siemens Healthineers AG (ETR:SHL), with a market cap of €35.0b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Siemens Healthineers’s financial liquidity and leverage to give you an idea of Siemens Healthineers’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into SHL here.
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Does SHL produce enough cash relative to debt?
SHL has shrunken its total debt levels in the last twelve months, from €9.2b to €4.1b – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €311m for investing into the business. Additionally, SHL has produced €1.4b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 35%, meaning that SHL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SHL’s case, it is able to generate 0.35x cash from its debt capital.
Can SHL meet its short-term obligations with the cash in hand?
With current liabilities at €5.1b, the company has been able to meet these obligations given the level of current assets of €6.7b, with a current ratio of 1.32x. Usually, for Medical Equipment companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SHL face the risk of succumbing to its debt-load?
With debt reaching 49% of equity, SHL 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of SHL’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In SHL’s case, the ratio of 10.54x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SHL are considered a risk-averse investment.
Next Steps:
SHL’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 SHL’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 SHL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Siemens Healthineers to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SHL’s future growth? Take a look at our free research report of analyst consensus for SHL’s outlook.
Valuation: What is SHL 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 SHL 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 editorial-team@simplywallst.com.
