What does Ryanair Holdings plc’s (ISE:RY4C) Balance Sheet Tell Us About Its Future?
Investors pursuing a solid, dependable stock investment can often be led to Ryanair Holdings plc (ISE:RY4C), a large-cap worth €13b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Ryanair Holdings’s financial liquidity and leverage to give you an idea of Ryanair Holdings’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 RY4C here.
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How much cash does RY4C generate through its operations?
RY4C’s debt levels have fallen from €4.2b to €3.8b over the last 12 months , which also accounts for long term debt. With this debt repayment, RY4C currently has €2.8b remaining in cash and short-term investments , ready to deploy into the business. Moreover, RY4C has generated cash from operations of €1.9b over the same time period, leading to an operating cash to total debt ratio of 51%, signalling that RY4C’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RY4C’s case, it is able to generate 0.51x cash from its debt capital.
Can RY4C pay its short-term liabilities?
Looking at RY4C’s €2.9b in current liabilities, the company has been able to meet these commitments with a current assets level of €3.6b, leading to a 1.25x current account ratio. Generally, for Airlines companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can RY4C service its debt comfortably?
RY4C is a relatively highly levered company with a debt-to-equity of 70%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can test if RY4C’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For RY4C, the ratio of 26.4x suggests that interest is comfortably covered. Large-cap investments like RY4C are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
RY4C’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for RY4C’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ryanair Holdings to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for RY4C’s future growth? Take a look at our free research report of analyst consensus for RY4C’s outlook.
Valuation: What is RY4C 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 RY4C 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 editorial-team@simplywallst.com.
