Is BG Group plc Dependent On Debt?

Are debt levels at BG Group plc (LON: BG) becoming unaffordable and detrimental to the company’s future prospects?

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It’s been a difficult start to 2014 for shareholders in BG (LSE: BG) (NASDAQOTH: BRGYY.US), with the company delivering a profit warning just a few weeks into the start of the calendar year.

As you would expect, shares dropped by around 25% and have ticked up around 10% since the announcement, as the rest of the stock market has firmed up following concerns surrounding emerging market growth.

So, after disappointing with its most recent update, is BG Group still financially sound and able to withstand further problems regarding its asset base? Or, is it time for investors to look elsewhere for market-beating returns?

Financial strength

With a debt to equity ratio of 55%, BG does not appear to be carrying too much leverage on its balance sheet. Indeed, with every £1 of net assets being matched by £0.55 of debt, BG’s financial risk seems to be moderate and strikes a balance between providing a turbo-boost to returns for shareholders while not putting the company under too much pressure to make interest payments.

On this topic, BG’s interest coverage ratio is a very healthy 32, which means that in 2013 it was able to make net interest payments 32 times before it would have exhausted operating profit. A figure so high means that BG Group could comfortably afford to borrow more money to invest in its current asset base (and in expanding it further). Even when interest rates rise, current interest cover of 32 seems to be more than adequate to cope with a higher cost of debt.

Reinvestment

Of course, a profit warning means profits are not going to meet expectations and, with BG having a significant profit warning just one month ago, it is prudent for investors to consider whether the business could withstand a dip in profitability. Indeed, with interest costs being covered so comfortably, BG seems able to withstand a prolonged drop in profit and still remain financially sound. This not only means that BG should be around over the long run, but also that it can afford to maintain (if not increase) investment in its asset base in order to drive profitability upwards in future years.

Looking ahead

So, with a considerable amount of financial strength and flexibility, BG looks to be a solid company that has the potential to reinvest in its assets to improve profitability. Of course, this may take a little while but the 25% drop in the share price in January may seem like a distant memory, as BG looks set to be a strong performer over the medium term.

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 does not own shares in BG.

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