A market capitalization of AUD A$16.54B puts AGL Energy Limited (ASX:AGL) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. There are always disruptions which destabilize an existing industry, and although large-caps are hard to knock down, it is useful to understand its level of resilience. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for AGL Energy
Is AGL’s level of debt at an acceptable level?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. In the case of AGL, the debt-to-equity ratio is 45.72%, which indicates that its debt can cause trouble for the company in a downturn but it is still at a manageable level. While debt-to-equity ratio has several factors at play, an easier way to check whether AGL’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. AGL’s profits amply covers interest at 9.65 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as AGL’s high interest coverage is seen as responsible and safe practice.
Does AGL generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether AGL has the ability to repay its debt with cash from its business, which is less of a concern for large companies. Last year, AGL’s operating cash flow was 0.26x its current debt. A ratio of over a 0.25x is a positive sign and shows that AGL is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? Although AGL’s debt level is towards the higher end of the spectrum, investors shouldn’t panic since its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since AGL’s financial position may change over time, You should continue researching market expectations for AGL’s future growth on our free analysis platform.