Reckitt Benckiser Group plc (LSE:RB.)’s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. However, my main concerns are around how the company is managing its balance sheet, and whether their current financial status is sustainable. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
First, a short introduction to the company is in order. Reckitt Benckiser Group plc manufactures, markets, and sells health, hygiene, and home products. Started in 1823, it operates in United Kingdom and is recently valued at UK£41.25B.
The company is growing incredibly fast, with a year-on-year revenue growth of 16.39% over the past financial year , and a bottom line growth of 84.28%. Since 2013, revenue has increased by 1.46%, parallel with larger capital expenditure, which most recently reached UK£286.00M. RB. has been reinvesting more into the business, leading to expected return on investment of 16.56% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to UK£2.19B over the next year, and over the next five years, earnings are expected to grow at an annual rate of 2.69% on average. These figures illustrate RB.’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. Two major red flags for RB. are its high level of debt at 0.95x equity, and its low level of cash generated from its core operating activities, covering a mere 19.37% of debt. Furthemore, its debt-to-equity ratio has also been increasing from 55.34% five years ago. Although, EBIT is able to amply cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of RB.’s financial health lowers my conviction around the sustainability of the business going forward. RB. has poor near-term liquidity, with short term assets (cash and other liquid assets) unable to cover its upcoming liabilities in the next year, let alone longer term liabilities. One reason I do like RB. as a business is its low level of fixed assets on its balance sheet (7.98% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. RB. has virtually no fixed assets, which minimizes its downside risk.
RB. is now trading at UK£59.97 per share. With 704.2 million shares, that’s a UK£41.25B market cap – which is about right based on a 5-year cumulative average growth rate (CAGR) of 2.83% (source: analyst consensus). With an upcoming 2018 free cash flow figure of UK£2.40B, the target price for RB. is UK£62.64. This means the stock is currently trading at a relatively fair value. However, comparing RB.’s current share price to its peers based on its industry and earnings level, it’s undervalued by 63.88%, with a PE ratio of 12.48x vs. the industry average of 20.45x.
If you’re thinking about buying RB., you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.