U.S. Markets closed

Norfolk Southern Corporation (NYSE:NSC): Time For A Financial Health Check

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The size of Norfolk Southern Corporation (NYSE:NSC), a US$52b large-cap, often attracts investors seeking a reliable investment in the stock market. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the health of the financials determines whether the company continues to succeed. Today we will look at Norfolk Southern’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into NSC here.

See our latest analysis for Norfolk Southern

NSC’s Debt (And Cash Flows)

NSC has built up its total debt levels in the last twelve months, from US$11b to US$12b , which accounts for long term debt. With this rise in debt, NSC currently has US$411m remaining in cash and short-term investments , ready to be used for running the business. Additionally, NSC has generated cash from operations of US$3.8b in the last twelve months, leading to an operating cash to total debt ratio of 31%, meaning that NSC’s current level of operating cash is high enough to cover debt.

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

At the current liabilities level of US$2.9b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.67x. The current ratio is the number you get when you divide current assets by current liabilities.

NYSE:NSC Historical Debt, June 17th 2019

Does NSC face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 76%, NSC can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times NSC’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For NSC, the ratio of 7.28x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like NSC are considered a risk-averse investment.

Next Steps:

Although NSC’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for NSC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Norfolk Southern to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for NSC’s future growth? Take a look at our free research report of analyst consensus for NSC’s outlook.
  2. Valuation: What is NSC 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 NSC 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.

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 editorial-team@simplywallst.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.