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What You Must Know About Diageo plc's (LON:DGE) Financial Strength

Simply Wall St

The size of Diageo plc (LON:DGE), a UK£74b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. I will provide an overview of Diageo’s financial liquidity and leverage to give you an idea of Diageo’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into DGE here.

View our latest analysis for Diageo

DGE’s Debt (And Cash Flows)

Over the past year, DGE has ramped up its debt from UK£10b to UK£12b , which includes long-term debt. With this increase in debt, DGE currently has UK£1.6b remaining in cash and short-term investments to keep the business going. Additionally, DGE has generated UK£3.4b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 28%, meaning that DGE’s operating cash is sufficient to cover its debt.

Can DGE pay its short-term liabilities?

At the current liabilities level of UK£7.1b, the company has been able to meet these obligations given the level of current assets of UK£11b, with a current ratio of 1.48x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Beverage companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

LSE:DGE Historical Debt, April 17th 2019

Can DGE service its debt comfortably?

Diageo is a highly levered company given that total debt exceeds equity. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. The sustainability of DGE’s debt levels can be assessed by comparing the company’s interest payments to earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For DGE, the ratio of 17.28x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes DGE and other large-cap investments thought to be safe.

Next Steps:

Although DGE’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. Since there is also no concerns around DGE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how DGE has been performing in the past. I suggest you continue to research Diageo to get a more holistic view of the large-cap by looking at:

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