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Does Centrica plc’s (LON:CNA) Debt Level Pose A Problem?

Stocks with market capitalization between $2B and $10B, such as Centrica plc (LON:CNA) with a size of UK£7.3b, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Let’s take a look at CNA’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CNA here.

See our latest analysis for Centrica

How much cash does CNA generate through its operations?

CNA’s debt levels have fallen from UK£6.3b to UK£5.3b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at UK£1.6b for investing into the business. On top of this, CNA has produced UK£1.6b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 30%, indicating that CNA’s debt is appropriately covered by operating cash. 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.

Can CNA meet its short-term obligations with the cash in hand?

Looking at CNA’s UK£7.6b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of UK£8.0b, with a current ratio of 1.05x. Usually, for Integrated Utilities companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:CNA Historical Debt November 26th 18
LSE:CNA Historical Debt November 26th 18

Can CNA service its debt comfortably?

With total debt exceeding equities, CNA is considered a highly levered company. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. 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. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CNA’s case, the ratio of 3.77x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although CNA’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 CNA has company-specific issues impacting its capital structure decisions. You should continue to research Centrica to get a better picture of the mid-cap by looking at:

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  1. 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.

  2. 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.

  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.

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.