Yahoo Finance What Investors Should Know About Aristocrat Leisure Limited’s (ASX:ALL) Financial Strength
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Aristocrat Leisure Limited (ASX:ALL) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Aristocrat Leisure’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALL here. See our latest analysis for Aristocrat Leisure
Does ALL produce enough cash relative to debt?
ALL’s debt levels have fallen from AU$1.30b to AU$1.20b over the last 12 months – this includes both the current and long-term debt. With this debt payback, ALL’s cash and short-term investments stands at AU$553.50m for investing into the business. On top of this, ALL has generated cash from operations of AU$799.10m in the last twelve months, resulting in an operating cash to total debt ratio of 66.58%, signalling that ALL’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 ALL’s case, it is able to generate 0.67x cash from its debt capital.
Does ALL’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$653.10m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. For Hospitality companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ALL’s debt level acceptable?
Considering Aristocrat Leisure’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. By measuring how many times ALL’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In ALL’s case, the ratio of 12.11x suggests that interest is comfortably covered. Large-cap investments like ALL are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although ALL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how ALL has been performing in the past. I recommend you continue to research Aristocrat Leisure to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ALL’s future growth? Take a look at our free research report of analyst consensus for ALL’s outlook.
Valuation: What is ALL 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 ALL 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 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.
