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With a market capitalization of AU$32b, Woodside Petroleum Ltd (ASX:WPL) is a large-cap stock, which is considered by most investors as a safe bet. Common characteristics for these big stocks are their strong balance sheet and high liquidity, which means there's plenty of stocks available to the public for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for WPL, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.

See our latest analysis for Woodside Petroleum

WPL’s Debt (And Cash Flows)

WPL's debt levels have fallen from US$5.1b to US$4.1b over the last 12 months , which also accounts for long term debt. With this debt payback, WPL's cash and short-term investments stands at US$1.7b , ready to be used for running the business. Additionally, WPL has generated cash from operations of US$3.3b in the last twelve months, leading to an operating cash to total debt ratio of 81%, signalling that WPL’s debt is appropriately covered by operating cash.

Does WPL’s liquid assets cover its short-term commitments?

At the current liabilities level of US$1.0b, it seems that the business has been able to meet these commitments with a current assets level of US$2.4b, leading to a 2.31x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas 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 WPL face the risk of succumbing to its debt-load?

With debt at 22% of equity, WPL may be thought of as appropriately levered. This range is considered safe as WPL is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether WPL is able to meet its debt obligations by looking at the net interest coverage ratio. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In WPL's case, the ratio of 19.26x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes WPL and other large-cap investments thought to be safe.

Next Steps:

WPL’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for WPL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Woodside Petroleum to get a more holistic view of the stock by looking at: