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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Celanese Corporation (NYSE:CE) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. This article will examine Celanese’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CE here.
Does CE Produce Much Cash Relative To Its Debt?
Over the past year, CE has maintained its debt levels at around US$3.9b which accounts for long term debt. At this current level of debt, CE currently has US$447m remaining in cash and short-term investments to keep the business going. Moreover, CE has generated cash from operations of US$1.7b over the same time period, leading to an operating cash to total debt ratio of 44%, indicating that CE’s debt is appropriately covered by operating cash.
Can CE meet its short-term obligations with the cash in hand?
With current liabilities at US$1.8b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.58x. The current ratio is the number you get when you divide current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CE face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Celanese is considered to have high leverage. 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. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if CE’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For CE, the ratio of 1228x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CE and other large-cap investments thought to be safe.
CE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CE's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CE has been performing in the past. I recommend you continue to research Celanese to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CE’s future growth? Take a look at our free research report of analyst consensus for CE’s outlook.
- Valuation: What is CE worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CE is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.