The size of Nucor Corporation (NYSE:NUE), a US$17b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to extending previous success is in the health of the company’s financials. This article will examine Nucor’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NUE here.
How much cash does NUE generate through its operations?
NUE has sustained its debt level by about US$4.3b over the last 12 months including long-term debt. At this current level of debt, NUE’s cash and short-term investments stands at US$1.9b , ready to deploy into the business. Moreover, NUE has generated cash from operations of US$2.2b over the same time period, resulting in an operating cash to total debt ratio of 51%, signalling that NUE’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NUE’s case, it is able to generate 0.51x cash from its debt capital.
Can NUE meet its short-term obligations with the cash in hand?
Looking at NUE’s US$2.8b in current liabilities, the company has been able to meet these commitments with a current assets level of US$8.8b, leading to a 3.15x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can NUE service its debt comfortably?
With debt reaching 42% of equity, NUE may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times NUE’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. 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. In NUE’s case, the ratio of 18.95x suggests that interest is amply covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like NUE are considered a risk-averse investment.
NUE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for NUE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Nucor to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NUE’s future growth? Take a look at our free research report of analyst consensus for NUE’s outlook.
- Valuation: What is NUE 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 NUE 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.
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 firstname.lastname@example.org.