How FCAU’s Leverage Position Looks before Its 1Q17 Results
FCAU’s leverage position
The auto industry is highly capital-intensive in nature due to its high raw material and manufacturing costs. As a result, auto companies such as Fiat Chrysler Automobiles (FCAU) tend to utilize debt extensively. In this article, we’ll take a closer look at Fiat Chrysler’s latest leverage ratios ahead of its 1Q17 earnings results.
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High debt levels also increase the risk profile of a company, as debt is a contractual obligation that a company must fulfill regardless of market conditions. Therefore, it’s important for investors to pay attention to an auto company’s leverage position.
Is FCAU’s debt position improving?
At the end of fiscal 2016, Fiat Chrysler’s net industrial debt stood at 4.6 billion euros (about $5.1 billion). This level reflected a decrease of about 464 million euros (about $498 million) since the end of fiscal 2015.
During its 4Q16 earnings call, Fiat Chrysler’s management reassured investors about its net industrial debt reduction targets. The company plans to have about 4 billion–5 billion euros in cash (about $4.3 billion–$5.4 billion) by the end of fiscal 2018.
In 2016, FCAU repeatedly suggested that it has more than enough liquidity to reduce its debt levels significantly during the next couple of years.
Progress on 2017 guidance?
In January 2017, FCAU guided to reduce its net industrial debt to less than 2.5 billion euros, or $2.7 billion, by the end of this year. Therefore, investors could be eyeing the company’s progress in this direction during its 1Q17 earnings event.
Fiat Chrysler has the highest level of debt built into its capital structure among most major automakers (VCR), including Ford (F), General Motors (GM), and Volkswagen (VLKAY). FCAU’s high leverage position suggests that its peers are in better shape in terms of financial health. A significantly high debt position can make a business’ profit and loss levels highly volatile, thereby increasing its risk profile.
Continue to the next part to find out where FCAU’s valuation multiples stand before its 1Q17 earnings release.