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There are a number of reasons that attract investors towards large-cap companies such as Schlumberger Limited (NYSE:SLB), with a market cap of US$87.61B. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Schlumberger’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SLB here. View our latest analysis for Schlumberger
How much cash does SLB generate through its operations?
Over the past year, SLB has reduced its debt from US$19.62B to US$18.20B , which is made up of current and long term debt. With this debt repayment, SLB’s cash and short-term investments stands at US$5.09B for investing into the business. Additionally, SLB has produced cash from operations of US$5.66B in the last twelve months, resulting in an operating cash to total debt ratio of 31.12%, meaning that SLB’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In SLB’s case, it is able to generate 0.31x cash from its debt capital.
Does SLB’s liquid assets cover its short-term commitments?
With current liabilities at US$15.28B, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.21x. Generally, for Energy Services 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.
Can SLB service its debt comfortably?
SLB is a relatively highly levered company with a debt-to-equity of 48.84%. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since SLB is presently unprofitable, 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.