In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The size of Magna International Inc. (TSE:MG), a CA$22b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. This article will examine Magna International’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MG here.
View our latest analysis for Magna International
How does MG’s operating cash flow stack up against its debt?
Over the past year, MG has ramped up its debt from US$3.7b to US$4.6b – this includes long-term debt. With this growth in debt, MG’s cash and short-term investments stands at US$884m , ready to deploy into the business. On top of this, MG has produced US$3.6b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 77%, indicating that MG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MG’s case, it is able to generate 0.77x cash from its debt capital.
Does MG’s liquid assets cover its short-term commitments?
At the current liabilities level of US$11b, it seems that the business has been able to meet these commitments with a current assets level of US$13b, leading to a 1.19x current account ratio. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MG service its debt comfortably?
MG is a relatively highly levered company with a debt-to-equity of 40%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For MG, the ratio of 33.2x suggests that interest is amply covered. Large-cap investments like MG are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.