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Newcrest Mining Limited (ASX:NCM), a large-cap worth AU$23b, 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 firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for NCM to determine is solvency and liquidity and whether the stock is a sound investment.
NCM’s Debt (And Cash Flows)
NCM's debt level has been constant at around US$2.0b over the previous year which accounts for long term debt. At this stable level of debt, NCM's cash and short-term investments stands at US$1.0b to keep the business going. Moreover, NCM has produced US$1.4b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 72%, meaning that NCM’s debt is appropriately covered by operating cash.
Does NCM’s liquid assets cover its short-term commitments?
With current liabilities at US$637m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.9b, with a current ratio of 2.92x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can NCM service its debt comfortably?
With debt at 27% of equity, NCM may be thought of as appropriately levered. This range is considered safe as NCM is not taking on too much debt obligation, which may be constraining for future growth. We can test if NCM’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For NCM, the ratio of 8.17x suggests that interest is appropriately covered. Large-cap investments like NCM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
NCM’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NCM's financial health. Other important fundamentals need to be considered alongside. You should continue to research Newcrest Mining to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NCM’s future growth? Take a look at our free research report of analyst consensus for NCM’s outlook.
- Valuation: What is NCM 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 NCM 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.