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There are a number of reasons that attract investors towards large-cap companies such as NextEra Energy, Inc. (NYSE:NEE), with a market cap of US$88b. 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 health of the financials determines whether the company continues to succeed. Today we will look at NextEra Energy’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 NEE here.
Does NEE produce enough cash relative to debt?
Over the past year, NEE has ramped up its debt from US$35b to US$38b , which accounts for long term debt. With this increase in debt, NEE currently has US$638m remaining in cash and short-term investments for investing into the business. Additionally, NEE has generated cash from operations of US$6.6b over the same time period, leading to an operating cash to total debt ratio of 17%, signalling that NEE’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NEE’s case, it is able to generate 0.17x cash from its debt capital.
Can NEE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$18b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.36x.
Does NEE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 100%, NEE can be considered as an above-average leveraged company. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can check to see whether NEE is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In NEE’s case, the ratio of 3.05x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as NEE is a safe investment.
With a high level of debt on its balance sheet, NEE could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for NEE to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for NEE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NextEra Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NEE’s future growth? Take a look at our free research report of analyst consensus for NEE’s outlook.
- Valuation: What is NEE 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 NEE 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 email@example.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. On rare occasion, data errors may occur. Thank you for reading.