Yahoo Finance Has South32 Limited (ASX:S32) Got Enough Cash?
With a market capitalization of AU$17b, South32 Limited (ASX:S32) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there’s plenty of stocks available to the public for trading. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for S32, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
View our latest analysis for South32
How does S32’s operating cash flow stack up against its debt?
S32’s debt levels have fallen from US$1.0b to US$929m over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$3.1b , ready to deploy into the business. Additionally, S32 has produced US$1.7b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 185%, indicating that S32’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In S32’s case, it is able to generate 1.85x cash from its debt capital.
Does S32’s liquid assets cover its short-term commitments?
With current liabilities at US$1.7b, it seems that the business has been able to meet these commitments with a current assets level of US$4.8b, leading to a 2.9x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is S32’s debt level acceptable?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. With a debt-to-equity ratio of 8.7%, S32’s debt level is relatively low. This range is considered safe as S32 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether S32 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For S32, the ratio of 599x suggests that interest is comfortably covered. Large-cap investments like S32 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
S32 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how S32 has been performing in the past. I suggest you continue to research South32 to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for S32’s future growth? Take a look at our free research report of analyst consensus for S32’s outlook.
Valuation: What is S32 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 S32 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.