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Investors pursuing a solid, dependable stock investment can often be led to Southern Copper Corporation (NYSE:SCCO), a large-cap worth US$32b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the health of the financials determines whether the company continues to succeed. Let’s take a look at Southern Copper’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into SCCO here.
SCCO’s Debt (And Cash Flows)
SCCO has sustained its debt level by about US$6.0b over the last 12 months – this includes long-term debt. At this constant level of debt, SCCO currently has US$1.1b remaining in cash and short-term investments , ready to be used for running the business. On top of this, SCCO has produced cash from operations of US$2.2b over the same time period, leading to an operating cash to total debt ratio of 38%, signalling that SCCO’s operating cash is sufficient to cover its debt.
Can SCCO meet its short-term obligations with the cash in hand?
Looking at SCCO’s US$1.2b in current liabilities, the company has been able to meet these commitments with a current assets level of US$3.2b, leading to a 2.61x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does SCCO face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 90%, SCCO can be considered as an above-average leveraged company. 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 SCCO’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In SCCO's case, the ratio of 11.03x 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 SCCO are considered a risk-averse investment.
Although SCCO’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. Since there is also no concerns around SCCO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SCCO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Southern Copper to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SCCO’s future growth? Take a look at our free research report of analyst consensus for SCCO’s outlook.
- Valuation: What is SCCO 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 SCCO 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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.