Are Deutsche Lufthansa AG’s (FRA:LHA) Interest Costs Too High?
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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Deutsche Lufthansa AG (FRA:LHA) 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. I will provide an overview of Deutsche Lufthansa’s financial liquidity and leverage to give you an idea of Deutsche Lufthansa’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into LHA here.
Check out our latest analysis for Deutsche Lufthansa
Does LHA produce enough cash relative to debt?
LHA has shrunken its total debt levels in the last twelve months, from €6.9b to €6.5b , which also accounts for long term debt. With this debt payback, LHA’s cash and short-term investments stands at €4.1b for investing into the business. Moreover, LHA has generated cash from operations of €4.3b over the same time period, resulting in an operating cash to total debt ratio of 67%, meaning that LHA’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In LHA’s case, it is able to generate 0.67x cash from its debt capital.
Can LHA meet its short-term obligations with the cash in hand?
At the current liabilities level of €16b, it seems that the business may not have an easy time meeting these commitments with a current assets level of €12b, leading to a current ratio of 0.78x.
Can LHA service its debt comfortably?
With a debt-to-equity ratio of 57%, LHA can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because 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. We can test if LHA’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For LHA, the ratio of 31x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as LHA is a safe investment.
Next Steps:
Although LHA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. 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 LHA’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Deutsche Lufthansa to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LHA’s future growth? Take a look at our free research report of analyst consensus for LHA’s outlook.
Valuation: What is LHA 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 LHA 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.
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