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Does Transurban Group’s (ASX:TCL) Debt Level Pose A Problem?

There are a number of reasons that attract investors towards large-cap companies such as Transurban Group (ASX:TCL), with a market cap of AU$27.06b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. Let’s take a look at Transurban Group’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 TCL here. View out our latest analysis for Transurban Group

Does TCL produce enough cash relative to debt?

TCL’s debt levels surged from AU$13.28b to AU$14.11b over the last 12 months , which is made up of current and long term debt. With this rise in debt, TCL currently has AU$1.15b remaining in cash and short-term investments , ready to deploy into the business. Additionally, TCL has generated cash from operations of AU$837.00m in the last twelve months, leading to an operating cash to total debt ratio of 5.93%, indicating that TCL’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TCL’s case, it is able to generate 0.059x cash from its debt capital.

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

With current liabilities at AU$2.14b, it appears that the company has not been able to meet these commitments with a current assets level of AU$1.28b, leading to a 0.6x current account ratio. which is under the appropriate industry ratio of 3x.

ASX:TCL Historical Debt June 21st 18
ASX:TCL Historical Debt June 21st 18

Is TCL’s debt level acceptable?

Since equity is smaller than total debt levels, Transurban Group is considered to have high leverage. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times TCL’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TCL, the ratio of 1.51x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Transurban Group defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.

Next Steps:

With a high level of debt on its balance sheet, TCL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for TCL to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure TCL has company-specific issues impacting its capital structure decisions. You should continue to research Transurban Group to get a better picture of the stock by looking at:

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

  2. Valuation: What is TCL 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 TCL 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 pass 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.