What does BHP Billiton plc’s (LON:BLT) Balance Sheet Tell Us About Its Future?
There are a number of reasons that attract investors towards large-cap companies such as BHP Billiton plc (LSE:BLT), with a market cap of UK£76.73B. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at BHP Billiton’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 BLT here. Check out our latest analysis for BHP Billiton
How does BLT’s operating cash flow stack up against its debt?
BLT has shrunken its total debt levels in the last twelve months, from US$38.19B to US$31.82B , which comprises of short- and long-term debt. With this reduction in debt, BLT currently has US$14.18B remaining in cash and short-term investments for investing into the business. On top of this, BLT has generated cash from operations of US$16.80B over the same time period, resulting in an operating cash to total debt ratio of 52.81%, signalling that BLT’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In BLT’s case, it is able to generate 0.53x cash from its debt capital.
Can BLT pay its short-term liabilities?
With current liabilities at US$11.37B, the company has been able to meet these commitments with a current assets level of US$21.06B, leading to a 1.85x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can BLT service its debt comfortably?
BLT is a relatively highly levered company with a debt-to-equity of 45.77%. 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 test if BLT’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For BLT, the ratio of 14.41x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as BLT is a safe investment.
Next Steps:
BLT’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 BLT’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure BLT has company-specific issues impacting its capital structure decisions. I suggest you continue to research BHP Billiton to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for BLT’s future growth? Take a look at our free research report of analyst consensus for BLT’s outlook.
Valuation: What is BLT 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 BLT 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
