There are a number of reasons that attract investors towards large-cap companies such as CSX Corporation (NASDAQ:CSX), with a market cap of US$48.84B. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the key to extending previous success is in the health of the company’s financials. 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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CSX here. See our latest analysis for CSX
Does CSX produce enough cash relative to debt?
Over the past year, CSX has maintained its debt levels at around US$11.81B – this includes both the current and long-term debt. At this stable level of debt, CSX’s cash and short-term investments stands at US$419.00M for investing into the business. Additionally, CSX has generated US$3.47B in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 29.40%, meaning that CSX’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CSX’s case, it is able to generate 0.29x cash from its debt capital.
Can CSX pay its short-term liabilities?
At the current liabilities level of US$1.89B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$1.92B, with a current ratio of 1.01x. Generally, for Transportation companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CSX service its debt comfortably?
With debt reaching 80.22% of equity, CSX may be thought of as relatively highly levered. 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 CSX’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. In CSX’s case, the ratio of 7.26x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like CSX are considered a risk-averse investment.
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 recommend you continue to research CSX to get a better picture of the large-cap by looking at:
- 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.
- 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.
- 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.