Imperial Oil Limited (TSE:IMO): Financial Strength Analysis
Imperial Oil Limited (TSE:IMO), a large-cap worth CA$31b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Assessing the most recent data for IMO, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.
Check out our latest analysis for Imperial Oil
IMO’s Debt (And Cash Flows)
IMO's debt level has been constant at around CA$5.2b over the previous year – this includes long-term debt. At this current level of debt, the current cash and short-term investment levels stands at CA$988m , ready to be used for running the business. On top of this, IMO has produced cash from operations of CA$3.9b over the same time period, leading to an operating cash to total debt ratio of 75%, meaning that IMO’s current level of operating cash is high enough to cover debt.
Can IMO pay its short-term liabilities?
At the current liabilities level of CA$4.0b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Oil and Gas companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does IMO face the risk of succumbing to its debt-load?
With debt at 21% of equity, IMO may be thought of as appropriately levered. IMO is not taking on too much debt commitment, which may be constraining for future growth. We can test if IMO’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In IMO's case, the ratio of 115x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as IMO is a safe investment.
Next Steps:
IMO’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how IMO has been performing in the past. I recommend you continue to research Imperial Oil to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for IMO’s future growth? Take a look at our free research report of analyst consensus for IMO’s outlook.
Valuation: What is IMO 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 IMO 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.
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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.
