Is Santos Limited’s (ASX:STO) Balance Sheet A Threat To Its Future?
Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Santos Limited (ASX:STO), with a market capitalization of AU$12.21B, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. This article will examine STO’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. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into STO here. See our latest analysis for Santos
How does STO’s operating cash flow stack up against its debt?
STO’s debt levels have fallen from US$5.24B to US$3.94B over the last 12 months , which comprises of short- and long-term debt. With this debt payback, STO’s cash and short-term investments stands at US$1.23B , ready to deploy into the business. Additionally, STO has produced US$1.25B in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 31.65%, meaning that STO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In STO’s case, it is able to generate 0.32x cash from its debt capital.
Can STO meet its short-term obligations with the cash in hand?
Looking at STO’s most recent US$951.00M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.07x. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is STO’s debt level acceptable?
STO is a relatively highly levered company with a debt-to-equity of 55.14%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. But since STO is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although STO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how STO has been performing in the past. You should continue to research Santos to get a more holistic view of the mid-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for STO’s future growth? Take a look at our free research report of analyst consensus for STO’s outlook.
Valuation: What is STO 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 STO 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 pass 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.
