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How Financially Strong Is Valero Energy Corporation (NYSE:VLO)?

Simply Wall St

Valero Energy Corporation (NYSE:VLO), a large-cap worth US$35b, 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. However, the key to their continued success lies in its financial health. I will provide an overview of Valero Energy’s financial liquidity and leverage to give you an idea of Valero Energy’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 VLO here.

View our latest analysis for Valero Energy

Does VLO produce enough cash relative to debt?

VLO’s debt level has been constant at around US$9.1b over the previous year including long-term debt. At this current level of debt, VLO currently has US$3.0b remaining in cash and short-term investments for investing into the business. Additionally, VLO has generated US$4.4b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 48%, indicating that VLO’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In VLO’s case, it is able to generate 0.48x cash from its debt capital.

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

Looking at VLO’s US$11b in current liabilities, the company has been able to meet these commitments with a current assets level of US$18b, leading to a 1.65x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NYSE:VLO Historical Debt, March 4th 2019

Can VLO service its debt comfortably?

With debt reaching 40% of equity, VLO may be thought of as relatively 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times VLO’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For VLO, the ratio of 9.77x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes VLO and other large-cap investments thought to be safe.

Next Steps:

VLO’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 VLO’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 VLO has been performing in the past. I recommend you continue to research Valero Energy to get a better picture of the large-cap by looking at:

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