Republic Services, Inc. (NYSE:RSG), a large-cap worth US$25b, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. Today we will look at Republic Services’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into RSG here.
RSG’s Debt (And Cash Flows)
RSG’s debt level has been constant at around US$8.3b over the previous year which accounts for long term debt. At this stable level of debt, RSG’s cash and short-term investments stands at US$71m to keep the business going. Moreover, RSG has produced US$2.2b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 27%, signalling that RSG’s debt is appropriately covered by operating cash.
Can RSG pay its short-term liabilities?
With current liabilities at US$2.7b, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$1.6b, with a current ratio of 0.58x. The current ratio is calculated by dividing current assets by current liabilities.
Does RSG face the risk of succumbing to its debt-load?
Considering Republic Services’s total debt outweighs its equity, the company is deemed 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times RSG’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In RSG’s case, the ratio of 4.33x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes RSG and other large-cap investments thought to be safe.
Although RSG’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. Though 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 RSG has company-specific issues impacting its capital structure decisions. You should continue to research Republic Services to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RSG’s future growth? Take a look at our free research report of analyst consensus for RSG’s outlook.
- Valuation: What is RSG 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 RSG 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.
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