The size of Sempra Energy (NYSE:SRE), a US$30.8b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Sempra Energy’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SRE here.
How much cash does SRE generate through its operations?
Over the past year, SRE has ramped up its debt from US$18.3b to US$26.2b , which comprises of short- and long-term debt. With this rise in debt, SRE currently has US$258m remaining in cash and short-term investments , ready to deploy into the business. On top of this, SRE has generated cash from operations of US$3.4b in the last twelve months, leading to an operating cash to total debt ratio of 13%, indicating that SRE’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SRE’s case, it is able to generate 0.13x cash from its debt capital.
Can SRE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$8.6b liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$4.9b, with a current ratio of 0.58x.
Can SRE service its debt comfortably?
Considering Sempra Energy’s total debt outweighs its equity, the company is deemed highly levered. 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. But since SRE is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
SRE’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 SRE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Sempra Energy to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 email@example.com.