Is TELUS Corporation (TSX:T) A Financially Sound Company?
There are a number of reasons that attract investors towards large-cap companies such as TELUS Corporation (TSX:T), with a market cap of CAD CA$28.84B. One such reason is its ‘too big to fail’ aura which gives it the appearance of a strong and healthy investment. However, investors may not be aware of the metrics used to measure financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for TELUS
Can T service its debt comfortably?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. In the case of T, the debt-to-equity ratio is over 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. We can test if T’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In T’s case, its interest is excessively covered by its earnings as the ratio sits at 4.81x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Does T generate an acceptable amount of cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether T has the ability to repay its debt with cash from its business, which is less of a concern for large companies. In the case of T, operating cash flow turned out to be 0.27x its debt level over the past twelve months. A ratio of over a 0.25x is a positive sign and shows that T is generating ample cash from its core business, which should increase its potential to pay back near-term debt.
Next Steps:
Are you a shareholder? T’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that T’s financial position could change over time, I encourage researching market expectations for T’s future growth on our free analysis platform.
Are you a potential investor? Although understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I encourage potential investors to look at T’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.
