Yahoo Finance What does BHP Billiton plc’s (LON:BLT) Balance Sheet Tell Us About Its Future?
Investors pursuing a solid, dependable stock investment can often be led to BHP Billiton plc (LON:BLT), a large-cap worth UK£89.33b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of BHP Billiton’s financial liquidity and leverage to give you an idea of BHP Billiton’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into BLT here.
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How much cash does BLT generate through its operations?
Over the past year, BLT has reduced its debt from US$31.82b to US$28.02b , which comprises of short- and long-term debt. With this debt repayment, BLT’s cash and short-term investments stands at US$15.90b for investing into the business. On top of this, BLT has generated cash from operations of US$18.46b in the last twelve months, leading to an operating cash to total debt ratio of 65.9%, indicating that BLT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BLT’s case, it is able to generate 0.66x cash from its debt capital.
Can BLT pay its short-term liabilities?
Looking at BLT’s most recent US$13.99b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.51x. Usually, for Metals and Mining companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does BLT face the risk of succumbing to its debt-load?
With debt reaching 46.2% of equity, BLT may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if BLT’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For BLT, the ratio of 22.86x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as BLT is a safe investment.
Next Steps:
BLT’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around BLT’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure BLT has company-specific issues impacting its capital structure decisions. You should continue to research BHP Billiton to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BLT’s future growth? Take a look at our free research report of analyst consensus for BLT’s outlook.
Valuation: What is BLT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BLT is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
