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Is Neste Oyj (HEL:NESTE) As Strong As Its Balance Sheet Indicates?

Raj Burman

Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Neste Oyj (HEL:NESTE). With a market valuation of €21b, NESTE 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. Assessing the most recent data for NESTE, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.

See our latest analysis for Neste Oyj

How does NESTE’s operating cash flow stack up against its debt?

NESTE has sustained its debt level by about €1.2b over the last 12 months which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at €999m for investing into the business. On top of this, NESTE has produced cash from operations of €1.4b in the last twelve months, resulting in an operating cash to total debt ratio of 118%, signalling that NESTE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In NESTE’s case, it is able to generate 1.18x cash from its debt capital.

Can NESTE meet its short-term obligations with the cash in hand?

At the current liabilities level of €2.6b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.62x. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

HLSE:NESTE Historical Debt January 25th 19

Can NESTE service its debt comfortably?

NESTE’s level of debt is appropriate relative to its total equity, at 26%. This range is considered safe as NESTE is not taking on too much debt obligation, which may be constraining for future growth. We can test if NESTE’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In NESTE’s case, the ratio of 143x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as NESTE is a safe investment.

Next Steps:

NESTE’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how NESTE has been performing in the past. I recommend you continue to research Neste Oyj to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NESTE’s future growth? Take a look at our free research report of analyst consensus for NESTE’s outlook.
  2. Valuation: What is NESTE 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 NESTE is currently mispriced by the market.
  3. 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.