Is Royal Dutch Shell Plc Dependent On Debt?

Are debt levels at Royal Dutch Shell Plc (LON: RDSB) becoming unaffordable and detrimental to the company’s future prospects?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

royal dutch shell

The last five years have seen profits become extremely volatile at Shell (LSE: RDSB) (NYSE: RDS-B.US), with pre-tax profit climbing to $55.5 billion in 2011 before falling to $33.6 billion in 2013.

Indeed, Shell’s share price has been somewhat volatile, too, and has underperformed the FTSE 100 by 24.5% over the period, with the FTSE 100 making gains of 57% and Shell only able to deliver an increase of 32.5%.

However, one major plus point for investors continues to be its longevity. Sure, demand for oil will fluctuate, with a higher oil price being beneficial to Shell, but the company’s finances seem to be in good order and this means that it is likely to be around for the long haul.

For instance, Shell’s debt to equity ratio currently stands at a rather modest 25%, which means that for every £1 of net assets, Shell has £0.25 of debt. This is low compared to other FTSE 100 companies and shows that management is relatively conservative in how it chooses to finance the business.

Furthermore, Shell enjoys a significant amount of headroom when servicing its debt, as evidenced by an interest coverage ratio of 48. This is exceptionally high and highlights the fact that Shell has relatively low debt levels (as mentioned) but also, crucially, that it remains highly profitable.

Indeed, although Shell’s profit has fluctuated wildly over the last five years, it still packs a punch when it comes to making money. Moreover, impressive levels of earnings per share (EPS) growth are forecast for the next two years and should lead to Shell being in an even stronger position over the medium term.

As ever, Shell remains an attractive company for income-seeking investors. Although interest rates are not going to remain at 0.5% indefinitely, they look set to do so for a good while yet, so Shell’s above-average yield of 5% should help to allay fears surrounding inflation and the challenges of having next to no return on cash investments.

Indeed, when interest rates do rise, Shell looks set to be in a strong position as a result of its low debt levels and high profitability. This enviable position should mean that shares perform well over the long run.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Peter owns shares in Shell. 

More on Investing Articles

Young black man looking at phone while on the London Overground
Investing Articles

1 delicious penny stock I reckon can deliver juicy returns and growth

This food delivery penny stock has experienced a surge in performance and uptake recently. Our writer is excited by its…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares the day Tufan Erginbilgiç joined here’s what I’d have now

Harvey Jones is startled by just how fast the Rolls-Royce share price has risen since its transformative CEO took over.…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

How much do I need to invest in Lloyds shares to earn income of £1,000 a year?

Harvey Jones is getting income and growth from his Lloyds shares but wished he'd bought more of them. So he's…

Read more »

Illustration of flames over a black background
Investing Articles

Down 75%! Will the Saga share price ever be loved again?

The last few years have been incredibly difficult for those watching the Saga share price. But what does the future…

Read more »

Investing Articles

What kind of return could I expect by investing £100 monthly in a Stocks and Shares ISA?

Using a Stocks and Shares ISA to avoid capital gains tax could grow a £100 monthly investment into a second…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Can strong operational momentum keep the Informa share price rising?

FTSE 100 company Informa has been performing well, but this may be just the beginning of a multi-year trend for…

Read more »

Market Movers

What’s going on with the Britvic share price?

Jon Smith flags up why Britvic's share price is surging on Friday, but believes that the company is in a…

Read more »

Cheerful young businesspeople with laptop working in office
Dividend Shares

2 super-cheap passive income shares I’m eyeing up right now

Jon Smith discusses two of his favourite passive income shares in the banking and property sectors, both featuring yields above…

Read more »