Investors pursuing a solid, dependable stock investment can often be led to Albemarle Corporation (NYSE:ALB), a large-cap worth $12.82B. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. Today we will look at Albemarle’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into ALB here. View our latest analysis for Albemarle
How does ALB’s operating cash flow stack up against its debt?
ALB’s debt levels have fallen from $3,817.2M to $2,369.3M over the last 12 months – this includes both the current and long-term debt. With this debt payback, ALB’s cash and short-term investments stands at $2,269.8M , ready to deploy into the business. Additionally, ALB has generated $733.4M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30.95%, signalling that ALB’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 ALB’s case, it is able to generate 0.31x cash from its debt capital.
Does ALB’s liquid assets cover its short-term commitments?
Looking at ALB’s most recent $1,140.1M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $3,306.6M, with a current ratio of 2.9x. Generally, for Chemicals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ALB face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 44.30%, ALB can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times ALB’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In ALB’s case, the ratio of 9.07x suggests that interest is well-covered. Large-cap investments like ALB are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.