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Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider VERBUND AG (VIE:VER). With a market valuation of €16b, VER is a safe haven in times of market uncertainty due to its strong balance sheet. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for VER to determine is solvency and liquidity and whether the stock is a sound investment.
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See our latest analysis for VERBUND
Does VER Produce Much Cash Relative To Its Debt?
VER has sustained its debt level by about €2.4b over the last 12 months which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at €177m , ready to be used for running the business. Additionally, VER has produced cash from operations of €745m over the same time period, resulting in an operating cash to total debt ratio of 31%, signalling that VER’s debt is appropriately covered by operating cash.
Can VER pay its short-term liabilities?
Looking at VER’s €1.5b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.71x. The current ratio is the number you get when you divide current assets by current liabilities.
Does VER face the risk of succumbing to its debt-load?
VER’s level of debt is appropriate relative to its total equity, at 38%. This range is considered safe as VER is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether VER 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 VER's case, the ratio of 6.65x 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 VER is a safe investment.
Next Steps:
VER has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. But, 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 VER has been performing in the past. I recommend you continue to research VERBUND to get a more holistic view of the stock by looking at: