Is Unilever plc Dependent On Debt?

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

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Along with many other companies that rely upon the developing world for a significant amount of sales, Unilever (LSE: ULVR) (NYSE: UL.US) has had a tough start to 2014. Indeed, it is currently down 2% in 2014 year-to-date, while the FTSE 100 is up 1% (at the time of writing).

However, this is perhaps better than expected, since over half of Unilever’s revenue is derived from emerging markets. With the FTSE 100 dipping in 2014 due to concerns surrounding the sustainability of the emerging market growth story, it could be argued that shares in Unilever should have been hit harder.

That aside, Unilever’s portfolio of major consumer brands, such as Dove and Lynx, did not come cheap. Indeed, borrowings are almost a prerequisite when building such a large portfolio of brands. So, while the market has not reacted strongly in 2014 to Unilever’s large exposure to emerging markets, should it still be concerned about its debt levels?

Excessive debt?

With a debt to equity ratio of 78%, Unilever’s financial gearing is best described as ‘moderate’. That’s because it is not particularly high and does not put too much strain on the balance sheet, but also boosts returns to shareholders. Therefore, at first glance, Unilever’s financial gearing does not appear to be excessive.

Furthermore, Unilever remains an extremely profitable company and is, therefore, very capable of making the interest payments on its debt. For instance, Unilever’s interest coverage ratio was a very healthy 19 in its most recent financial year, which means that the company was able to make the net interest payments on its debt nineteen times before operating profit was exhausted. Plenty of headroom, indeed.

Looking Forward

Of course, the fact that the majority of Unilever’s revenue is derived from emerging markets has the potential to be a major positive for the company. That’s because Unilever tends to focus on discretionary brands, which are perceived by many people to be luxury items. As emerging markets continue to develop, their populations will almost inevitably demand such products in greater amounts.

So, with comfortable debt levels and the potential for future growth, Unilever could prove to be a strong performer in the remaining ten months of 2014.

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 Unilever. The Motley Fool owns shares in Unilever.

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