Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as NTPC Limited (NSE:NTPC) a safer option. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of NTPC’s financial liquidity and leverage to give you an idea of NTPC’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into NTPC here.
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How much cash does NTPC generate through its operations?
Over the past year, NTPC has ramped up its debt from ₹1.14t to ₹1.30t – this includes both the current and long-term debt. With this growth in debt, NTPC's cash and short-term investments stands at ₹13.46b , ready to deploy into the business. Moreover, NTPC has generated ₹196.63b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15.1%, indicating that NTPC’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NTPC’s case, it is able to generate 0.15x cash from its debt capital.
Can NTPC pay its short-term liabilities?
Looking at NTPC’s most recent ₹456.50b liabilities, it appears that the company has not been able to meet these commitments with a current assets level of ₹392.49b, leading to a 0.86x current account ratio. which is under the appropriate industry ratio of 3x.
Does NTPC face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, NTPC is considered to have high leverage. 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if NTPC’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For NTPC, the ratio of 3.66x suggests that interest is well-covered. Large-cap investments like NTPC are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
NTPC’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 NTPC's financial health. Other important fundamentals need to be considered alongside. You should continue to research NTPC to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NTPC’s future growth? Take a look at our free research report of analyst consensus for NTPC’s outlook.
- Valuation: What is NTPC 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 NTPC 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 editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.