Large-cap companies such as Imperial Oil Limited (TSX:IMO), with a market-capitalization of CA$32.51B, are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns more comforting than explosive growth potential. But another key factor to consider when investing in IMO is its financial health. There are always disruptions which destabilize an existing industry, and although large-caps are hard to knock down, it is useful to understand its level of resilience. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Imperial Oil
Does IMO face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. In the case of IMO, the debt-to-equity ratio is 20.84%, which means the risk of facing a debt-overhang is very low.
Does IMO generate enough cash through operations?
A basic way to evaluate IMO’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses IMO’s debt repayment capacity, which is not a big concern for a large company. Last year, IMO’s operating cash flow was 0.47x its current debt. A ratio of over a 0.25x is a positive sign and shows that IMO is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
Are you a shareholder? IMO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Given that IMO’s financial situation may change, You should continue researching market expectations for IMO’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. Therefore, I encourage potential investors to examine IMO’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.