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 €24b, NESTE is a safe haven in times of market uncertainty due to its strong balance sheet. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Today I will analyse the latest financial data for NESTE to determine is solvency and liquidity and whether the stock is a sound investment.
NESTE’s Debt (And Cash Flows)
NESTE has built up its total debt levels in the last twelve months, from €1.2b to €1.4b – this includes long-term debt. With this growth in debt, NESTE's cash and short-term investments stands at €1.3b , ready to be used for running the business. Additionally, NESTE has generated cash from operations of €1.2b during the same period of time, leading to an operating cash to total debt ratio of 90%, indicating that NESTE’s operating cash is sufficient to cover its debt.
Can NESTE pay its short-term liabilities?
Looking at NESTE’s €2.1b in current liabilities, the company has been able to meet these obligations given the level of current assets of €4.3b, with a current ratio of 2.05x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can NESTE service its debt comfortably?
With debt at 28% of equity, NESTE may be thought of as appropriately levered. 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. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For NESTE, the ratio of 32.57x suggests that interest is comfortably covered. Large-cap investments like NESTE are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
NESTE’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. I admit this is a fairly basic analysis for NESTE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Neste Oyj to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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.
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