Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
STMicroelectronics N.V. (EPA:STM), a large-cap worth €12b, 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. 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 STM, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
STM’s Debt (And Cash Flows)
STM’s debt levels surged from US$1.7b to US$1.9b over the last 12 months , which accounts for long term debt. With this increase in debt, STM currently has US$2.6b remaining in cash and short-term investments to keep the business going. On top of this, STM has produced cash from operations of US$1.8b in the last twelve months, leading to an operating cash to total debt ratio of 97%, signalling that STM’s current level of operating cash is high enough to cover debt.
Does STM’s liquid assets cover its short-term commitments?
Looking at STM’s US$2.1b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$5.9b, leading to a 2.76x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Semiconductor companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can STM service its debt comfortably?
STM’s level of debt is appropriate relative to its total equity, at 30%. This range is considered safe as STM is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if STM’s debt levels are sustainable by measuring interest payments against earnings of a company. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For STM, the ratio of 201x suggests that interest is comfortably covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like STM are considered a risk-averse investment.
STM’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. Keep in mind I haven’t considered other factors such as how STM has been performing in the past. I suggest you continue to research STMicroelectronics to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for STM’s future growth? Take a look at our free research report of analyst consensus for STM’s outlook.
- Valuation: What is STM 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 STM 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.