What You Must Know About Telstra Corporation Limited’s (ASX:TLS) Financial Strength

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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Telstra Corporation Limited (ASX:TLS) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. Today we will look at Telstra’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into TLS here.

Check out our latest analysis for Telstra

TLS’s Debt (And Cash Flows)

TLS has sustained its debt level by about AU$19b over the last 12 months including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at AU$541m to keep the business going. On top of this, TLS has generated cash from operations of AU$7.7b over the same time period, resulting in an operating cash to total debt ratio of 41%, meaning that TLS’s debt is appropriately covered by operating cash.

Can TLS pay its short-term liabilities?

At the current liabilities level of AU$8.1b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.92x. The current ratio is the number you get when you divide current assets by current liabilities.

ASX:TLS Historical Debt, June 7th 2019
ASX:TLS Historical Debt, June 7th 2019

Is TLS’s debt level acceptable?

Considering Telstra’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. 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 test if TLS’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In TLS’s case, the ratio of 4.67x suggests that interest is appropriately 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:

TLS’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. Though 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. You should 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.

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 editorial-team@simplywallst.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.