Large-cap companies such as CIMIC Group Limited (ASX:CIM), with a market-capitalization of A$16.50B, are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns more comforting than explosive growth potential. But another key factor to consider when investing in CIM is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for CIM
Does CIM face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. In the case of CIM, the debt-to-equity ratio is 33.21%, which means its debt level does not pose a threat to its operations right now. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. CIM’s interest on debt is sufficiently covered by earnings as it sits at around 27.08x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does CIM generate enough cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether CIM has the ability to repay its debt with cash from its business, which is less of a concern for large companies. CIM’s recent operating cash flow exceeded its debt obligations within the past year,which indicates extremely low risk of CIM not being able to meet its debt near-team, given that it generates enough cash in a year to pay off its current debt.This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.
Next Steps:
Are you a shareholder? CIM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Given that CIM’s capital structure may change, I suggest assessing market expectations for CIM’s future growth on our free analysis platform.