Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Iberdrola SA (BME:IBE) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. Let’s take a look at Iberdrola’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into IBE here.
Does IBE produce enough cash relative to debt?
IBE has built up its total debt levels in the last twelve months, from €32.17b to €37.48b , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at €3.64b , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of IBE’s operating efficiency ratios such as ROA here.
Can IBE pay its short-term liabilities?
Looking at IBE’s most recent €15.69b liabilities, the company is not able to meet these obligations given the level of current assets of €13.53b, with a current ratio of 0.86x below the prudent level of 3x.
Does IBE face the risk of succumbing to its debt-load?
IBE is a relatively highly levered company with a debt-to-equity of 85.59%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In IBE’s case, the ratio of 4.38x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes IBE and other large-cap investments thought to be safe.
IBE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for IBE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Iberdrola to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IBE’s future growth? Take a look at our free research report of analyst consensus for IBE’s outlook.
- Valuation: What is IBE 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 IBE 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 email@example.com.