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Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider CIMIC Group Limited (ASX:CIM). With a market valuation of AU$16b, CIM is a safe haven in times of market uncertainty due to its strong balance sheet. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for CIM, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does CIM Produce Much Cash Relative To Its Debt?
CIM's debt levels have fallen from AU$903m to AU$523m over the last 12 months , which includes long-term debt. With this reduction in debt, CIM's cash and short-term investments stands at AU$2.1b , ready to be used for running the business. On top of this, CIM has generated AU$1.7b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 327%, indicating that CIM’s debt is appropriately covered by operating cash.
Can CIM pay its short-term liabilities?
At the current liabilities level of AU$6.1b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.91x. The current ratio is calculated by dividing current assets by current liabilities.
Does CIM face the risk of succumbing to its debt-load?
CIM’s level of debt is appropriate relative to its total equity, at 22%. CIM is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether CIM is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CIM's case, the ratio of 60.09x suggests that interest is comfortably covered. Large-cap investments like CIM are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
CIM’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure CIM has company-specific issues impacting its capital structure decisions. I recommend you continue to research CIMIC Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CIM’s future growth? Take a look at our free research report of analyst consensus for CIM’s outlook.
- Valuation: What is CIM 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 CIM 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 email@example.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.