What Investors Should Know About Equinor ASA's (OB:EQNR) Financial Strength
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The size of Equinor ASA (OB:EQNR), a øre577b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. This article will examine Equinor’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into EQNR here.
See our latest analysis for Equinor
EQNR’s Debt (And Cash Flows)
EQNR's debt levels surged from US$28b to US$30b over the last 12 months , which accounts for long term debt. With this rise in debt, EQNR's cash and short-term investments stands at US$16b , ready to be used for running the business. On top of this, EQNR has produced cash from operations of US$18b during the same period of time, leading to an operating cash to total debt ratio of 60%, signalling that EQNR’s debt is appropriately covered by operating cash.
Can EQNR meet its short-term obligations with the cash in hand?
With current liabilities at US$19b, it seems that the business has been able to meet these commitments with a current assets level of US$29b, leading to a 1.48x current account ratio. 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.
Does EQNR face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 55%, EQNR can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if EQNR’s debt levels are sustainable by measuring interest payments against earnings of a company. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For EQNR, the ratio of 177x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as EQNR is a safe investment.
Next Steps:
Although EQNR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how EQNR has been performing in the past. I suggest you continue to research Equinor to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for EQNR’s future growth? Take a look at our free research report of analyst consensus for EQNR’s outlook.
Valuation: What is EQNR 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 EQNR 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 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.
