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Is Royal Dutch Shell Plc Dependent On Debt?

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.

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> Peter owns shares in Shell.