The Southern Company (NYSE:SO), a large-cap worth US$45.58b, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. This article will examine Southern’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SO here. See our latest analysis for Southern
How much cash does SO generate through its operations?
Over the past year, SO has ramped up its debt from US$47.46b to US$50.79b , which is made up of current and long term debt. With this growth in debt, SO currently has US$2.13b remaining in cash and short-term investments , ready to deploy into the business. On top of this, SO has generated cash from operations of US$6.40b over the same time period, leading to an operating cash to total debt ratio of 12.59%, indicating that SO’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SO’s case, it is able to generate 0.13x cash from its debt capital.
Does SO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$13.59b liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$10.07b, leading to a 0.74x current account ratio. which is under the appropriate industry ratio of 3x.
Does SO face the risk of succumbing to its debt-load?
Considering Southern’s total debt outweighs its equity, the company is deemed highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if SO’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 SO, the ratio of 1.54x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Southern defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.
SO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure SO has company-specific issues impacting its capital structure decisions. You should continue to research Southern to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SO’s future growth? Take a look at our free research report of analyst consensus for SO’s outlook.
- Valuation: What is SO 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 SO 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.