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Is Telstra Corporation Limited's (ASX:TLS) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Telstra Corporation Limited (ASX:TLS) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. Let’s take a look at Telstra’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 TLS here.

View our latest analysis for Telstra

TLS’s Debt (And Cash Flows)

TLS has sustained its debt level by about AU$19b over the last 12 months – this includes long-term debt. At this current level of debt, TLS's cash and short-term investments stands at AU$541m to keep the business going. Additionally, TLS has produced AU$7.7b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 41%, signalling that TLS’s operating cash is sufficient to cover its debt.

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

With current liabilities at AU$8.1b, it seems that the business may not be able to easily meet these obligations given the level of current assets of AU$7.4b, with a current ratio of 0.92x. The current ratio is the number you get when you divide current assets by current liabilities.

ASX:TLS Historical Debt, April 17th 2019

Can TLS service its debt comfortably?

Telstra is a highly levered company given that total debt exceeds equity. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if TLS’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For TLS, the ratio of 4.67x 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 TLS are considered a risk-averse investment.

Next Steps:

TLS’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven't considered other factors such as how TLS has been performing in the past. You should continue to research Telstra to get a more holistic view of the stock by looking at:

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