Xcel Energy Inc (NASDAQ:XEL): Time For A Financial Health Check
Xcel Energy Inc (NASDAQ:XEL), a large-cap worth US$26b, comes to mind for investors seeking a strong and reliable stock investment. 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, the key to their continued success lies in its financial health. This article will examine Xcel Energy’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 XEL here.
View our latest analysis for Xcel Energy
How much cash does XEL generate through its operations?
XEL has built up its total debt levels in the last twelve months, from US$15b to US$17b – this includes long-term debt. With this increase in debt, XEL’s cash and short-term investments stands at US$240m , ready to deploy into the business. Additionally, XEL has generated cash from operations of US$3.3b in the last twelve months, resulting in an operating cash to total debt ratio of 20%, indicating that XEL’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 XEL’s case, it is able to generate 0.2x cash from its debt capital.
Can XEL meet its short-term obligations with the cash in hand?
Looking at XEL’s US$3.8b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x.
Is XEL’s debt level acceptable?
Xcel Energy is a highly levered company given that total debt exceeds equity. 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. The sustainability of XEL’s debt levels can be assessed by comparing the company’s interest payments to earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For XEL, the ratio of 3.03x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like XEL are considered a risk-averse investment.
Next Steps:
XEL’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for XEL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Xcel Energy to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for XEL’s future growth? Take a look at our free research report of analyst consensus for XEL’s outlook.
Historical Performance: What has XEL’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.
