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The size of Schneider Electric SE (EPA:SU), a €38.69b 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. But, its financial health remains the key to continued success. I will provide an overview of Schneider Electric’s financial liquidity and leverage to give you an idea of Schneider Electric’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SU here.
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How does SU’s operating cash flow stack up against its debt?
Over the past year, SU has ramped up its debt from €8.01b to €9.31b – this includes both the current and long-term debt. With this rise in debt, SU currently has €3.30b remaining in cash and short-term investments , ready to deploy into the business. On top of this, SU has generated €2.74b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29.4%, signalling that SU’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SU’s case, it is able to generate 0.29x cash from its debt capital.
Can SU pay its short-term liabilities?
With current liabilities at €12.03b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.2x. For Electrical companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SU service its debt comfortably?
With a debt-to-equity ratio of 43.9%, SU can be considered as an above-average leveraged company. 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether SU is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In SU’s case, the ratio of 17.59x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as SU is a safe investment.