Yahoo Finance Are Deutsche Telekom AG’s (FRA:DTE) Interest Costs Too High?
Deutsche Telekom AG (FRA:DTE), a large-cap worth €65.18b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. Let’s take a look at Deutsche Telekom’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 DTE here. View out our latest analysis for Deutsche Telekom
Does DTE produce enough cash relative to debt?
DTE’s debt levels have fallen from €64.65b to €57.53b over the last 12 months – this includes both the current and long-term debt. With this debt payback, DTE’s cash and short-term investments stands at €3.32b , ready to deploy into the business. Moreover, DTE has generated €17.20b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 29.89%, indicating that DTE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In DTE’s case, it is able to generate 0.3x cash from its debt capital.
Can DTE pay its short-term liabilities?
With current liabilities at €27.37b, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.75x, which is below the prudent industry ratio of 3x.
Is DTE’s debt level acceptable?
Deutsche Telekom is a highly levered company given that total debt exceeds equity. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if DTE’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. In DTE’s case, the ratio of 5.05x suggests that interest is well-covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes DTE and other large-cap investments thought to be safe.
Next Steps:
DTE’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for DTE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Deutsche Telekom to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for DTE’s future growth? Take a look at our free research report of analyst consensus for DTE’s outlook.
Valuation: What is DTE 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 DTE 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.
