Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Chevron Corporation (NYSE:CVX) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to their continued success lies in its financial health. This article will examine Chevron’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CVX here. View our latest analysis for Chevron
Does CVX produce enough cash relative to debt?
Over the past year, CVX has reduced its debt from US$46.13B to US$38.76B , which comprises of short- and long-term debt. With this debt repayment, CVX’s cash and short-term investments stands at US$4.82B for investing into the business. Additionally, CVX has produced cash from operations of US$20.52B in the last twelve months, leading to an operating cash to total debt ratio of 52.92%, indicating that CVX’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CVX’s case, it is able to generate 0.53x cash from its debt capital.
Does CVX’s liquid assets cover its short-term commitments?
Looking at CVX’s most recent US$27.74B liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. Usually, for Oil and Gas 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.
Can CVX service its debt comfortably?
CVX’s level of debt is appropriate relative to its total equity, at 25.96%. This range is considered safe as CVX is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if CVX’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 CVX, the ratio of 17.5x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as CVX is a safe investment.
CVX’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CVX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Chevron to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CVX’s future growth? Take a look at our free research report of analyst consensus for CVX’s outlook.
- Valuation: What is CVX 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 CVX 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.