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Is CSX Corporation (NASDAQ:CSX) A Financially Sound Company?

Simply Wall St

CSX Corporation (NASDAQ:CSX), a large-cap worth US$59b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Today we will look at CSX’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CSX here.

View our latest analysis for CSX

How does CSX’s operating cash flow stack up against its debt?

Over the past year, CSX has ramped up its debt from US$12b to US$15b , which includes long-term debt. With this growth in debt, CSX’s cash and short-term investments stands at US$1.1b , ready to deploy into the business. Additionally, CSX has produced cash from operations of US$4.6b in the last twelve months, leading to an operating cash to total debt ratio of 31%, signalling that CSX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CSX’s case, it is able to generate 0.31x cash from its debt capital.

Can CSX meet its short-term obligations with the cash in hand?

Looking at CSX’s US$1.9b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$2.6b, with a current ratio of 1.34x. Usually, for Transportation companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:CSX Historical Debt, February 28th 2019

Does CSX face the risk of succumbing to its debt-load?

Since equity is smaller than total debt levels, CSX is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether CSX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For CSX, the ratio of 7.97x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CSX and other large-cap investments thought to be safe.

Next Steps:

CSX’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 CSX’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 CSX has been performing in the past. I suggest you continue to research CSX to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CSX’s future growth? Take a look at our free research report of analyst consensus for CSX’s outlook.
  2. Valuation: What is CSX 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 CSX is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.