Is Fiat Chrysler Automobiles N.V.'s (BIT:FCA) Balance Sheet Strong Enough To Weather A Storm?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Fiat Chrysler Automobiles N.V. (BIT:FCA) 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, the key to extending previous success is in the health of the company’s financials. This article will examine Fiat Chrysler Automobiles’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 FCA here.
Check out our latest analysis for Fiat Chrysler Automobiles
Does FCA produce enough cash relative to debt?
FCA's debt levels have fallen from €18b to €15b over the last 12 months – this includes long-term debt. With this reduction in debt, FCA currently has €13b remaining in cash and short-term investments , ready to deploy into the business. Additionally, FCA has generated cash from operations of €9.9b over the same time period, resulting in an operating cash to total debt ratio of 68%, signalling that FCA’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In FCA’s case, it is able to generate 0.68x cash from its debt capital.
Does FCA’s liquid assets cover its short-term commitments?
With current liabilities at €46b, the company may not have an easy time meeting these commitments with a current assets level of €38b, leading to a current ratio of 0.82x.
Is FCA’s debt level acceptable?
With debt reaching 58% of equity, FCA may be thought of as relatively highly levered. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. We can assess the sustainability of FCA’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For FCA, the ratio of 7.21x suggests that interest is appropriately covered. Large-cap investments like FCA are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although FCA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure FCA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Fiat Chrysler Automobiles to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FCA’s future growth? Take a look at our free research report of analyst consensus for FCA’s outlook.
- Valuation: What is FCA 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 FCA 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
