Is Sempra Energy’s (NYSE:SRE) Balance Sheet A Threat To Its Future?

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The size of Sempra Energy (NYSE:SRE), a US$32b 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, the key to extending previous success is in the health of the company’s financials. This article will examine Sempra Energy’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SRE here.

View our latest analysis for Sempra Energy

How does SRE’s operating cash flow stack up against its debt?

Over the past year, SRE has ramped up its debt from US$19b to US$26b – this includes long-term debt. With this growth in debt, SRE’s cash and short-term investments stands at US$213m , ready to deploy into the business. Moreover, SRE has produced cash from operations of US$3.5b over the same time period, leading to an operating cash to total debt ratio of 14%, signalling that SRE’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SRE’s case, it is able to generate 0.14x cash from its debt capital.

Does SRE’s liquid assets cover its short-term commitments?

Looking at SRE’s US$8.5b in current liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.59x.

NYSE:SRE Historical Debt February 6th 19
NYSE:SRE Historical Debt February 6th 19

Does SRE face the risk of succumbing to its debt-load?

With total debt exceeding equities, Sempra Energy is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. Though, since SRE is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

SRE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how SRE has been performing in the past. I suggest you continue to research Sempra Energy to get a better picture of the stock by looking at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.