Are Veolia Environnement SA.’s (EPA:VIE) Interest Costs Too High?
There are a number of reasons that attract investors towards large-cap companies such as Veolia Environnement SA. (ENXTPA:VIE), with a market cap of €10.65B. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Veolia Environnement’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 VIE here. View our latest analysis for Veolia Environnement
How does VIE’s operating cash flow stack up against its debt?
VIE’s debt levels surged from €13.35B to €14.28B over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, VIE’s cash and short-term investments stands at €6.64B , ready to deploy into the business. Moreover, VIE has generated €2.45B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 17.17%, indicating that VIE’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VIE’s case, it is able to generate 0.17x cash from its debt capital.
Can VIE meet its short-term obligations with the cash in hand?
With current liabilities at €15.89B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. For Integrated Utilities companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can VIE service its debt comfortably?
Considering Veolia Environnement’s total debt outweighs its equity, the company is deemed 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 an advantage over small-caps through lower cost of capital due to cheaper financing. 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. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For VIE, the ratio of 3.13x suggests that interest is appropriately covered. Large-cap investments like VIE are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
VIE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure VIE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Veolia Environnement to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for VIE’s future growth? Take a look at our free research report of analyst consensus for VIE’s outlook.
Valuation: What is VIE 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 VIE 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 pass 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.
