Investors pursuing a solid, dependable stock investment can often be led to BT Group plc (LON:BT.A), a large-cap worth UK£22.19b. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, its financial health remains the key to continued success. Let’s take a look at BT Group’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into BT.A here.

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How does BT.A’s operating cash flow stack up against its debt?

BT.A’s debt levels surged from UK£12.71b to UK£14.28b over the last 12 months – this includes both the current and long-term debt. With this rise in debt, BT.A currently has UK£3.55b remaining in cash and short-term investments for investing into the business. Moreover, BT.A has produced UK£4.93b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 34.5%, meaning that BT.A’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BT.A’s case, it is able to generate 0.35x cash from its debt capital.

Does BT.A’s liquid assets cover its short-term commitments?

At the current liabilities level of UK£10.19b liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of UK£8.35b, leading to a current ratio of 0.82x.

Does BT.A face the risk of succumbing to its debt-load?

BT Group is a highly levered company given that total debt exceeds equity. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if BT.A’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. In BT.A’s case, the ratio of 7.66x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like BT.A are considered a risk-averse investment.

Next Steps:

BT.A’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. Though 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 BT.A has company-specific issues impacting its capital structure decisions. I suggest you continue to research BT Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for BT.A’s future growth? Take a look at our free research report of analyst consensus for BT.A’s outlook.

2. Valuation: What is BT.A 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 BT.A 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.

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.