There are a number of reasons that attract investors towards large-cap companies such as Southern Copper Corporation (NYSE:SCCO), with a market cap of US$38.37B. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to their continued success lies in its financial health. Today we will look at Southern Copper’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SCCO here. View our latest analysis for Southern Copper
How much cash does SCCO generate through its operations?
SCCO’s debt level has been constant at around US$5.96B over the previous year – this includes both the current and long-term debt. At this current level of debt, SCCO currently has US$1.06B remaining in cash and short-term investments for investing into the business. Additionally, SCCO has produced cash from operations of US$1.98B over the same time period, leading to an operating cash to total debt ratio of 33.18%, indicating that SCCO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SCCO’s case, it is able to generate 0.33x cash from its debt capital.
Can SCCO pay its short-term liabilities?
At the current liabilities level of US$1.17B liabilities, the company has been able to meet these commitments with a current assets level of US$3.17B, leading to a 2.71x current account ratio. Usually, for Metals and Mining companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does SCCO face the risk of succumbing to its debt-load?
With debt reaching 93.25% of equity, SCCO may be thought of as relatively highly levered. 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. The sustainability of SCCO’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In SCCO’s case, the ratio of 10.18x suggests that interest is comfortably 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.
SCCO’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 SCCO’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Southern Copper to get a more holistic view 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.
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.