Is LafargeHolcim Ltd’s (VTX:LHN) Balance Sheet A Threat To Its Future?
LafargeHolcim Ltd (SWX:LHN), a large-cap worth CHF32.85B, comes to mind for investors seeking a strong and reliable stock investment. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. Let’s take a look at LafargeHolcim’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into LHN here. See our latest analysis for LafargeHolcim
Does LHN produce enough cash relative to debt?
Over the past year, LHN has reduced its debt from CHF19.72B to CHF18.62B – this includes both the current and long-term debt. With this debt repayment, LHN currently has CHF4.22B remaining in cash and short-term investments for investing into the business. Additionally, LHN has generated cash from operations of CHF3.04B over the same time period, leading to an operating cash to total debt ratio of 16.32%, signalling that LHN’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In LHN’s case, it is able to generate 0.16x cash from its debt capital.
Does LHN’s liquid assets cover its short-term commitments?
With current liabilities at CHF11.52B, it seems that the business has been able to meet these commitments with a current assets level of CHF12.62B, leading to a 1.1x current account ratio. For Basic Materials companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does LHN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 60.12%, LHN can be considered as an above-average leveraged company. 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. Though, since LHN is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
LHN’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. This is only a rough assessment of financial health, and I’m sure LHN has company-specific issues impacting its capital structure decisions. You should continue to research LafargeHolcim to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for LHN’s future growth? Take a look at our free research report of analyst consensus for LHN’s outlook.
Valuation: What is LHN 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 LHN 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
