Investors pursuing a solid, dependable stock investment can often be led to E.ON SE (FRA:EOAN), a large-cap worth €21b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. Today we will look at E.ON’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EOAN here.
Does EOAN Produce Much Cash Relative To Its Debt?
EOAN’s debt levels have fallen from €13b to €9.9b over the last 12 months , which includes long-term debt. With this debt repayment, EOAN currently has €4.7b remaining in cash and short-term investments to keep the business going. Additionally, EOAN has produced cash from operations of €2.9b in the last twelve months, leading to an operating cash to total debt ratio of 29%, meaning that EOAN’s debt is appropriately covered by operating cash.
Can EOAN meet its short-term obligations with the cash in hand?
With current liabilities at €15b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.54x. The current ratio is calculated by dividing current assets by current liabilities. For Integrated Utilities companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can EOAN service its debt comfortably?
With total debt exceeding equities, E.ON is considered a highly levered company. 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. We can assess the sustainability of EOAN’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For EOAN, the ratio of 4.36x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as EOAN is a safe investment.
EOAN’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 EOAN has been performing in the past. I suggest you continue to research E.ON to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EOAN’s future growth? Take a look at our free research report of analyst consensus for EOAN’s outlook.
- Valuation: What is EOAN 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 EOAN 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.
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 firstname.lastname@example.org. 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.