Newcrest Mining Limited (ASX:NCM), a large-cap worth AU$15.9b, 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 NCM, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does NCM produce enough cash relative to debt?
NCM’s debt level has been constant at around US$2.0b over the previous year – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$953m for investing into the business. Additionally, NCM has generated US$1.4b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 72%, meaning that NCM’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NCM’s case, it is able to generate 0.72x cash from its debt capital.
Can NCM pay its short-term liabilities?
At the current liabilities level of US$651m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.57x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is NCM’s debt level acceptable?
With debt at 27% of equity, NCM may be thought of as appropriately levered. NCM is not taking on too much debt commitment, which may be constraining for future growth. We can test if NCM’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In NCM’s case, the ratio of 5.44x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes NCM and other large-cap investments thought to be safe.
NCM has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. I admit this is a fairly basic analysis for NCM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Newcrest Mining to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for NCM’s future growth? Take a look at our free research report of analyst consensus for NCM’s outlook.
- Valuation: What is NCM 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 NCM 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 past 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. For errors that warrant correction please contact the editor at email@example.com.