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With a market capitalization of €10.0b, Solvay SA (EBR:SOLB) 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. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for SOLB, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
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SOLB’s Debt (And Cash Flows)
SOLB’s debt levels have fallen from €4.2b to €3.8b over the last 12 months , which includes long-term debt. With this debt payback, SOLB’s cash and short-term investments stands at €1.2b , ready to be used for running the business. On top of this, SOLB has produced €1.7b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 45%, indicating that SOLB’s operating cash is sufficient to cover its debt.
Can SOLB pay its short-term liabilities?
With current liabilities at €3.9b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.68x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SOLB service its debt comfortably?
With a debt-to-equity ratio of 36%, SOLB’s debt level may be seen as prudent. SOLB is not taking on too much debt commitment, which may be constraining for future growth. We can test if SOLB’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In SOLB’s case, the ratio of 10.47x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like SOLB are considered a risk-averse investment.
Next Steps:
SOLB has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. I admit this is a fairly basic analysis for SOLB’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Solvay to get a more holistic view of the stock by looking at: