What You Must Know About Santos Limited’s (ASX:STO) Financial Strength

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Santos Limited (ASX:STO), with a market capitalization of US$13.06b, rarely draw their attention from the investing community. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine STO’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 STO here. See our latest analysis for Santos

Does STO produce enough cash relative to debt?

STO’s debt levels have fallen from US$5.24b to US$3.94b over the last 12 months , which is made up of current and long term debt. With this reduction in debt, STO currently has US$1.23b remaining in cash and short-term investments , ready to deploy into the business. Moreover, STO has produced cash from operations of US$1.25b in the last twelve months, leading to an operating cash to total debt ratio of 31.65%, indicating that STO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In STO’s case, it is able to generate 0.32x cash from its debt capital.

Does STO’s liquid assets cover its short-term commitments?

Looking at STO’s most recent US$951.00m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.07x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ASX:STO Historical Debt July 1st 18
ASX:STO Historical Debt July 1st 18

Does STO face the risk of succumbing to its debt-load?

STO is a relatively highly levered company with a debt-to-equity of 55.14%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since STO is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

STO’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. Since there is also no concerns around STO’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how STO has been performing in the past. I suggest you continue to research Santos to get a more holistic view of the mid-cap by looking at:

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