Yahoo Finance Is Centrica plc’s (LON:CNA) Balance Sheet A Threat To Its Future?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Centrica plc (LON:CNA) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. Today we will look at Centrica’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CNA here.
View our latest analysis for Centrica
How does CNA’s operating cash flow stack up against its debt?
CNA’s debt levels have fallen from UK£6.30b to UK£5.30b over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at UK£1.60b , ready to deploy into the business. Additionally, CNA has generated cash from operations of UK£1.61b during the same period of time, resulting in an operating cash to total debt ratio of 30.3%, indicating that CNA’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CNA’s case, it is able to generate 0.3x cash from its debt capital.
Does CNA’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£7.64b liabilities, 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. Usually, for Integrated Utilities companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CNA’s debt level acceptable?
Considering Centrica’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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if CNA’s debt levels are sustainable by measuring interest payments against earnings of a company. 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 CNA, the ratio of 3.77x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as CNA is a safe investment.
Next Steps:
CNA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how CNA has been performing in the past. I suggest you continue to research Centrica to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CNA’s future growth? Take a look at our free research report of analyst consensus for CNA’s outlook.
Valuation: What is CNA 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 CNA 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.
