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Investors pursuing a solid, dependable stock investment can often be led to Celanese Corporation (NYSE:CE), a large-cap worth US$13b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, its financial health remains the key to continued success. Let’s take a look at Celanese’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 CE here.
Does CE Produce Much Cash Relative To Its Debt?
CE's debt level has been constant at around US$3.9b over the previous year which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$447m , ready to be used for running the business. Moreover, CE has generated US$1.7b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 44%, signalling that CE’s operating cash is sufficient to cover its debt.
Can CE pay its short-term liabilities?
With current liabilities at US$1.8b, it seems that the business has been able to meet these commitments with a current assets level of US$2.9b, leading to a 1.58x current account ratio. 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's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CE’s debt level acceptable?
Considering Celanese’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In CE's case, 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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Celanese to get a better picture 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 email@example.com. 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.