There are a number of reasons that attract investors towards large-cap companies such as Continental Resources, Inc. (NYSE:CLR), with a market cap of US$15b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, its financial health remains the key to continued success. Today we will look at Continental Resources’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CLR here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
CLR’s Debt (And Cash Flows)
CLR has shrunk its total debt levels in the last twelve months, from US$6.2b to US$5.8b , which also accounts for long term debt. With this debt payback, CLR currently has US$264m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CLR has produced cash from operations of US$3.3b over the same time period, leading to an operating cash to total debt ratio of 57%, meaning that CLR’s operating cash is sufficient to cover its debt.
Can CLR pay its short-term liabilities?
With current liabilities at US$1.4b, it appears that the company has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.03x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can CLR service its debt comfortably?
With a debt-to-equity ratio of 87%, CLR can be considered as an above-average leveraged company. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if CLR’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 CLR, the ratio of 5.27x suggests that interest is well-covered. Large-cap investments like CLR are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
CLR’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 CLR'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 CLR has been performing in the past. I recommend you continue to research Continental Resources to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLR’s future growth? Take a look at our free research report of analyst consensus for CLR’s outlook.
- Valuation: What is CLR 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 CLR 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.
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 email@example.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.