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The size of Fortum Oyj (HEL:FORTUM), a €17b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, its financial health remains the key to continued success. I will provide an overview of Fortum Oyj’s financial liquidity and leverage to give you an idea of Fortum Oyj’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 FORTUM here.
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FORTUM’s Debt (And Cash Flows)
FORTUM's debt levels surged from €4.5b to €6.8b over the last 12 months , which includes long-term debt. With this growth in debt, FORTUM currently has €1.8b remaining in cash and short-term investments to keep the business going. On top of this, FORTUM has generated €1.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 19%, indicating that FORTUM’s debt is not covered by operating cash.
Can FORTUM pay its short-term liabilities?
Looking at FORTUM’s €3.2b in current liabilities, the company has been able to meet these commitments with a current assets level of €4.0b, leading to a 1.24x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Electric Utilities companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FORTUM service its debt comfortably?
FORTUM is a relatively highly levered company with a debt-to-equity of 57%. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. 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 after interest and tax at least three times its net interest payments is considered financially sound. For FORTUM, the ratio of 8.31x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like FORTUM are considered a risk-averse investment.