Does Molson Coors Brewing Company’s (NYSE:TAP) Debt Level Pose A Problem?

The size of Molson Coors Brewing Company (NYSE:TAP), a US$13b large-cap, often attracts investors seeking a reliable investment in the stock market. 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. However, its financial health remains the key to continued success. Let’s take a look at Molson Coors Brewing’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into TAP here.

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Check out our latest analysis for Molson Coors Brewing

TAP’s Debt (And Cash Flows)

TAP has shrunk its total debt levels in the last twelve months, from US$11b to US$10b , which includes long-term debt. With this debt payback, TAP currently has US$234m remaining in cash and short-term investments , ready to be used for running the business. Additionally, TAP has generated US$1.9b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19%, signalling that TAP’s debt is not covered by operating cash.

Can TAP meet its short-term obligations with the cash in hand?

Looking at TAP’s US$4.2b in current liabilities, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$2.3b, with a current ratio of 0.56x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:TAP Historical Debt, May 21st 2019
NYSE:TAP Historical Debt, May 21st 2019

Can TAP service its debt comfortably?

TAP is a relatively highly levered company with a debt-to-equity of 74%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether TAP is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In TAP’s case, the ratio of 5.41x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as TAP is a safe investment.

Next Steps:

TAP’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. Furthermore, 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 TAP has been performing in the past. You should continue to research Molson Coors Brewing to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for TAP’s future growth? Take a look at our free research report of analyst consensus for TAP’s outlook.
  2. Valuation: What is TAP 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 TAP 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.

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.