Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as PG&E Corporation (NYSE:PCG) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. This article will examine PG&E’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into PCG here.
How does PCG’s operating cash flow stack up against its debt?
PCG’s debt levels surged from US$18b to US$19b over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$430m , ready to deploy into the business. Moreover, PCG has generated US$5.5b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 28%, signalling that PCG’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 PCG’s case, it is able to generate 0.28x cash from its debt capital.
Can PCG meet its short-term obligations with the cash in hand?
At the current liabilities level of US$9.5b liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.67x.
Can PCG service its debt comfortably?
PCG is a relatively highly levered company with a debt-to-equity of 98%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of PCG’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In PCG’s case, the ratio of 2.82x suggests that interest is not strongly covered. The sheer size of PG&E means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as PCG’s low interest coverage already puts the company in a risky position.
PCG’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. Though its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure PCG has company-specific issues impacting its capital structure decisions. You should continue to research PG&E to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PCG’s future growth? Take a look at our free research report of analyst consensus for PCG’s outlook.
- Historical Performance: What has PCG’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 email@example.com.