Telstra Corporation Limited (ASX:TLS): Time For A Financial Health Check

Telstra Corporation Limited (ASX:TLS), a large-cap worth AU$38.01B, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. 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

Does TLS produce enough cash relative to debt?

TLS has sustained its debt level by about AU$17.70B over the last 12 months comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$942.00M , ready to deploy into the business. Moreover, TLS has produced AU$7.78B in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 43.92%, indicating that TLS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In TLS’s case, it is able to generate 0.44x cash from its debt capital.

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

With current liabilities at AU$9.16B, it seems that the business has not been able to meet these commitments with a current assets level of AU$7.86B, leading to a 0.86x current account ratio. which is under the appropriate industry ratio of 3x.

Can TLS service its debt comfortably?

With total debt exceeding equities, Telstra is considered a highly levered company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can put the sustainability of TLS’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For TLS, the ratio of 10.15x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes TLS and other large-cap investments thought to be safe.

Next Steps:

Although TLS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for TLS's financial health. Other important fundamentals need to be considered alongside. I suggest you 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.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.