Is Ryanair Holdings plc's (ISE:RY4C) Balance Sheet A Threat To Its Future?

Simply Wall St

Ryanair Holdings plc (ISE:RY4C), a large-cap worth €12b, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. Today we will look at Ryanair Holdings’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. 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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Does RY4C Produce Much Cash Relative To Its Debt?

Over the past year, RY4C has reduced its debt from €4.0b to €3.6b – this includes long-term debt. With this debt payback, RY4C currently has €3.2b remaining in cash and short-term investments to keep the business going. On top of this, RY4C has produced cash from operations of €2.1b in the last twelve months, leading to an operating cash to total debt ratio of 57%, indicating that RY4C’s operating cash is sufficient to cover its debt.

Can RY4C meet its short-term obligations with the cash in hand?

At the current liabilities level of €4.1b, the company may not be able to easily meet these obligations given the level of current assets of €3.8b, with a current ratio of 0.93x. The current ratio is calculated by dividing current assets by current liabilities.

ISE:RY4C Historical Debt, May 22nd 2019

Is RY4C’s debt level acceptable?

With a debt-to-equity ratio of 70%, RY4C can be considered as an above-average leveraged company. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can assess the sustainability of RY4C’s debt levels to the test by looking at how well interest payments are covered by earnings. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In RY4C's case, the ratio of 18.33x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like RY4C are considered a risk-averse investment.

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. But, 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 RY4C has company-specific issues impacting its capital structure decisions. You should continue to research Ryanair Holdings to get a more holistic view of the stock by looking at:

  1. 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.
  2. 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.
  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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.