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What does Freeport-McMoRan Inc.'s (NYSE:FCX) Balance Sheet Tell Us About Its Future?

Simply Wall St

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The size of Freeport-McMoRan Inc. (NYSE:FCX), a US$16b large-cap, often attracts investors seeking a reliable investment in the stock market. 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 key to their continued success lies in its financial health. I will provide an overview of Freeport-McMoRan’s financial liquidity and leverage to give you an idea of Freeport-McMoRan’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into FCX here.

Check out our latest analysis for Freeport-McMoRan

Does FCX Produce Much Cash Relative To Its Debt?

Over the past year, FCX has reduced its debt from US$12b to US$10b , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$2.9b to keep the business going. On top of this, FCX has generated US$3.0b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 30%, signalling that FCX’s current level of operating cash is high enough to cover debt.

Does FCX’s liquid assets cover its short-term commitments?

Looking at FCX’s US$3.2b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.79x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:FCX Historical Debt, July 5th 2019

Can FCX service its debt comfortably?

FCX is a relatively highly levered company with a debt-to-equity of 56%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. The sustainability of FCX’s debt levels can be assessed by comparing the company’s interest payments to earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For FCX, the ratio of 6.79x 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 FCX are considered a risk-averse investment.

Next Steps:

FCX’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 FCX's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for FCX's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Freeport-McMoRan to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FCX’s future growth? Take a look at our free research report of analyst consensus for FCX’s outlook.
  2. Valuation: What is FCX 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 FCX 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.