Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as NTPC Limited (NSEI:NTPC) a safer option. 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. 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. Check out our latest analysis for NTPC
How much cash does NTPC generate through its operations?
NTPC’s debt levels surged from ₹998.26B to ₹1.14T over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, NTPC currently has ₹33.11B remaining in cash and short-term investments for investing into the business. Additionally, NTPC has generated ₹206.00B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 18.11%, indicating that NTPC’s operating cash is not sufficient to cover its 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 0.18x cash from its debt capital.
Can NTPC meet its short-term obligations with the cash in hand?
With current liabilities at ₹385.54B, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.78x, which is below the prudent industry ratio of 3x.
Does NTPC face the risk of succumbing to its debt-load?
NTPC is a highly levered company given that total debt exceeds equity. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. 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. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In NTPC’s case, the ratio of 4.26x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes NTPC and other large-cap investments thought to be safe.
NTPC’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how NTPC has been performing in the past. I recommend you 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.