Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The size of Fortum Oyj (HEL:FORTUM), a €17b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, its financial health remains the key to continued success. I will provide an overview of Fortum Oyj’s financial liquidity and leverage to give you an idea of Fortum Oyj’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 FORTUM here.
FORTUM’s Debt (And Cash Flows)
FORTUM's debt levels surged from €4.5b to €6.8b over the last 12 months , which includes long-term debt. With this growth in debt, FORTUM currently has €1.8b remaining in cash and short-term investments to keep the business going. On top of this, FORTUM has generated €1.3b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 19%, indicating that FORTUM’s debt is not covered by operating cash.
Can FORTUM pay its short-term liabilities?
Looking at FORTUM’s €3.2b in current liabilities, the company has been able to meet these commitments with a current assets level of €4.0b, leading to a 1.24x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Electric Utilities companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can FORTUM service its debt comfortably?
FORTUM is a relatively highly levered company with a debt-to-equity of 57%. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For FORTUM, the ratio of 8.31x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like FORTUM are considered a risk-averse investment.
FORTUM’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for FORTUM's financial health. Other important fundamentals need to be considered alongside. You should continue to research Fortum Oyj to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FORTUM’s future growth? Take a look at our free research report of analyst consensus for FORTUM’s outlook.
- Valuation: What is FORTUM 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 FORTUM 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 firstname.lastname@example.org. 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.