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Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Singapore Telecommunications Limited (SGX:Z74). With a market valuation of S$57b, Z74 is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Using the most recent data for Z74, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does Z74 Produce Much Cash Relative To Its Debt?
Over the past year, Z74 has maintained its debt levels at around S$11b – this includes long-term debt. At this stable level of debt, Z74's cash and short-term investments stands at S$513m to keep the business going. On top of this, Z74 has produced S$5.4b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 50%, signalling that Z74’s debt is appropriately covered by operating cash.
Can Z74 meet its short-term obligations with the cash in hand?
Looking at Z74’s S$8.8b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of S$7.1b, with a current ratio of 0.8x. The current ratio is calculated by dividing current assets by current liabilities.
Is Z74’s debt level acceptable?
Z74’s level of debt is appropriate relative to its total equity, at 36%. Z74 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether Z74 is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In Z74's case, the ratio of 7.29x suggests that interest is well-covered. Large-cap investments like Z74 are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Z74’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 lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I'm sure Z74 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Singapore Telecommunications to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for Z74’s future growth? Take a look at our free research report of analyst consensus for Z74’s outlook.
- Valuation: What is Z74 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 Z74 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.