The size of Cenovus Energy Inc. (TSE:CVE), a CA$15b large-cap, often attracts investors seeking a reliable investment in the stock market. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Cenovus Energy’s financial liquidity and leverage to give you an idea of Cenovus Energy’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CVE here.
How much cash does CVE generate through its operations?
CVE’s debt level has been constant at around CA$9.2b over the previous year – this includes long-term debt. At this stable level of debt, CVE’s cash and short-term investments stands at CA$781m for investing into the business. Additionally, CVE has generated CA$2.2b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24%, signalling that CVE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In CVE’s case, it is able to generate 0.24x cash from its debt capital.
Can CVE meet its short-term obligations with the cash in hand?
At the current liabilities level of CA$2.6b, it appears that the company has been able to meet these commitments with a current assets level of CA$3.2b, leading to a 1.23x current account ratio. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CVE service its debt comfortably?
CVE is a relatively highly levered company with a debt-to-equity of 52%. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since CVE is currently unprofitable, 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.
CVE’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, 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 CVE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cenovus Energy to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CVE’s future growth? Take a look at our free research report of analyst consensus for CVE’s outlook.
- Valuation: What is CVE 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 CVE 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.
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