CSL Limited (ASX:CSL), a large-cap worth A$64.81B, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of CSL’s financial liquidity and leverage to give you an idea of CSL’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into CSL here. See our latest analysis for CSL
How does CSL’s operating cash flow stack up against its debt?
CSL’s debt levels surged from $3,143.3M to $3,975.2M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, CSL’s cash and short-term investments stands at $849.7M for investing into the business. Additionally, CSL has generated cash from operations of $1,246.6M over the same time period, leading to an operating cash to total debt ratio of 31.36%, meaning that CSL’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CSL’s case, it is able to generate 0.31x cash from its debt capital.
Can CSL pay its short-term liabilities?
At the current liabilities level of $1,618.1M 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 2.84x. Generally, for Biotechs companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can CSL service its debt comfortably?
With total debt exceeding equities, CSL is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether CSL is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For CSL, the ratio of 22.36x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CSL and other large-cap investments thought to be safe.