There are a number of reasons that attract investors towards large-cap companies such as Shire plc (LSE:SHP), with a market cap of £31.26B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to their continued success lies in its financial health. Today we will look at Shire’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SHP here. Check out our latest analysis for Shire
Does SHP produce enough cash relative to debt?
Over the past year, SHP has ramped up its debt from $1,594.8M to $22,968.9M , which comprises of short- and long-term debt. With this growth in debt, SHP’s cash and short-term investments stands at $528.8M for investing into the business. Additionally, SHP has produced $2,658.9M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 11.58%, signalling that SHP’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SHP’s case, it is able to generate 0.12x cash from its debt capital.
Can SHP meet its short-term obligations with the cash in hand?
Looking at SHP’s most recent $7,743.3M liabilities, the company has not been able to meet these commitments with a current assets level of $7,539.5M, leading to a 0.97x current account ratio. which is under the appropriate industry ratio of 3x.
Is SHP’s debt level acceptable?
With a debt-to-equity ratio of 63.04%, SHP can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. The sustainability of SHP’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SHP’s case, the ratio of 6.95x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SHP are considered a risk-averse investment.
SHP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how SHP has been performing in the past. You should continue to research Shire to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for SHP’s future growth? Take a look at our free research report of analyst consensus for SHP’s outlook.
2. Valuation: What is SHP 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 SHP 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.