TRANSALTA CORP

Leveraged power producer posting a loss year with strong cash flow but weak returns and thin interest coverage.

Strengths

• Top-decile cash generation (FCF margin 16.5%, 93rd pct; OCF margin 27%)
• Solid gross margin (~59%, 50th pct) typical of a contracted utility

Risks

• Loss year: negative net margin (13th pct), ROE -10.8% (21st pct), ROIC 2.2% (7th pct)
• High leverage (D/E 2.45, 93rd pct) with interest coverage just 0.40 (18th pct)
• Revenue -11% (5th pct) and net income -169% (9th pct)

Notable findings

• No interest coverageInterest coverage 0.40 (cannot cover interest)
• High leverageHigh leverage (debt/equity 2.45)
• Net lossNet loss (net margin -6.6%)
• Weak liquidityCurrent ratio 0.73 (<1)
• Revenue declineRevenue -11.2% YoY