Continental Aktiengesellschaft (FRA:CON), a large-cap worth €31b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Using the most recent data for CON, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does CON Produce Much Cash Relative To Its Debt?
CON's debt levels surged from €4.1b to €4.6b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €2.8b to keep the business going. Additionally, CON has generated cash from operations of €5.0b over the same time period, leading to an operating cash to total debt ratio of 108%, meaning that CON’s current level of operating cash is high enough to cover debt.
Can CON pay its short-term liabilities?
Looking at CON’s €16b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Auto Components companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CON face the risk of succumbing to its debt-load?
CON’s level of debt is appropriate relative to its total equity, at 25%. CON is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CON is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In CON's case, the ratio of 33.82x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CON and other large-cap investments thought to be safe.
CON’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. Keep in mind I haven't considered other factors such as how CON has been performing in the past. I suggest you continue to research Continental to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CON’s future growth? Take a look at our free research report of analyst consensus for CON’s outlook.
- Valuation: What is CON 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 CON 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 email@example.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.