Investors pursuing a solid, dependable stock investment can often be led to Origin Energy Limited (ASX:ORG), a large-cap worth A$16.91B. 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. However, the key to their continued success lies in its financial health. I will provide an overview of Origin Energy’s financial liquidity and leverage to give you an idea of Origin Energy’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 ORG here. View our latest analysis for Origin Energy
How much cash does ORG generate through its operations?
ORG’s debt levels have fallen from A$10,000.0M to A$8,826.0M over the last 12 months , which is made up of current and long term debt. With this reduction in debt, ORG’s cash and short-term investments stands at A$203.0M for investing into the business. Moreover, ORG has generated cash from operations of A$1,289.0M over the same time period, leading to an operating cash to total debt ratio of 14.60%, meaning that ORG’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In ORG’s case, it is able to generate 0.15x cash from its debt capital.
Does ORG’s liquid assets cover its short-term commitments?
With current liabilities at A$3,854.0M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.3x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is ORG’s debt level acceptable?
With debt reaching 77.30% of equity, ORG may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. But since ORG is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.