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Schlumberger Limited (NYSE:SLB), a large-cap worth US$50b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. Today we will look at Schlumberger’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 SLB here.
SLB’s Debt (And Cash Flows)
SLB's debt levels have fallen from US$18b to US$17b over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$2.2b to keep the business going. Moreover, SLB has produced US$5.5b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 33%, signalling that SLB’s operating cash is sufficient to cover its debt.
Does SLB’s liquid assets cover its short-term commitments?
Looking at SLB’s US$12b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$16b, leading to a 1.35x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Energy Services companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SLB face the risk of succumbing to its debt-load?
SLB is a relatively highly levered company with a debt-to-equity of 45%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can test if SLB’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. In SLB's case, the ratio of 5.76x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes SLB and other large-cap investments thought to be safe.
Although SLB’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. Since there is also no concerns around SLB'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 SLB has been performing in the past. I suggest you continue to research Schlumberger to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SLB’s future growth? Take a look at our free research report of analyst consensus for SLB’s outlook.
- Valuation: What is SLB 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 SLB 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.