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Does Suncor Energy Inc.'s (TSE:SU) Debt Level Pose A Problem?

Investors pursuing a solid, dependable stock investment can often be led to Suncor Energy Inc. (TSE:SU), a large-cap worth CA$68b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. This article will examine Suncor Energy’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 SU here.

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Check out our latest analysis for Suncor Energy

SU’s Debt (And Cash Flows)

SU has built up its total debt levels in the last twelve months, from CA$18b to CA$19b , which accounts for long term debt. With this increase in debt, SU currently has CA$1.9b remaining in cash and short-term investments to keep the business going. Additionally, SU has produced cash from operations of CA$11b over the same time period, resulting in an operating cash to total debt ratio of 59%, signalling that SU’s current level of operating cash is high enough to cover debt.

Can SU pay its short-term liabilities?

Looking at SU’s CA$11b in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.88x. The current ratio is the number you get when you divide current assets by current liabilities.

TSX:SU Historical Debt, May 16th 2019
TSX:SU Historical Debt, May 16th 2019

Is SU’s debt level acceptable?

SU is a relatively highly levered company with a debt-to-equity of 43%. 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. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether SU is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For SU, the ratio of 8.19x 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 SU are considered a risk-averse investment.

Next Steps:

Although SU’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for SU's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Suncor Energy to get a better picture of the stock by looking at:

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

  2. Valuation: What is SU 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 SU 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.

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