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Is RWE Aktiengesellschaft's (FRA:RWE) Balance Sheet A Threat To Its Future?

The size of RWE Aktiengesellschaft (FRA:RWE), a €14b large-cap, often attracts investors seeking a reliable investment in the stock market. 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 key to their continued success lies in its financial health. Today we will look at RWE’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 RWE here.

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Check out our latest analysis for RWE

RWE’s Debt (And Cash Flows)

RWE has shrunk its total debt levels in the last twelve months, from €18b to €6.0b , which includes long-term debt. With this debt payback, RWE currently has €6.5b remaining in cash and short-term investments to keep the business going. On top of this, RWE has produced cash from operations of €3.2b in the last twelve months, leading to an operating cash to total debt ratio of 54%, indicating that RWE’s debt is appropriately covered by operating cash.

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

Looking at RWE’s €51b in current liabilities, the company has been able to meet these obligations given the level of current assets of €63b, with a current ratio of 1.25x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Integrated Utilities companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

DB:RWE Historical Debt, May 21st 2019
DB:RWE Historical Debt, May 21st 2019

Does RWE face the risk of succumbing to its debt-load?

RWE is a relatively highly levered company with a debt-to-equity of 48%. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. But since RWE is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although RWE’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. This is only a rough assessment of financial health, and I'm sure RWE has company-specific issues impacting its capital structure decisions. I recommend you continue to research RWE to get a more holistic view of the large-cap by looking at:

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

  2. Valuation: What is RWE 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 RWE 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.

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 editorial-team@simplywallst.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.

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