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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Barrick Gold Corporation (TSE:ABX) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to their continued success lies in its financial health. Today we will look at Barrick Gold’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 ABX here.
How much cash does ABX generate through its operations?
ABX has shrunken its total debt levels in the last twelve months, from US$6.4b to US$5.7b , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$1.7b for investing into the business. Additionally, ABX has produced cash from operations of US$1.9b in the last twelve months, resulting in an operating cash to total debt ratio of 34%, indicating that ABX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In ABX’s case, it is able to generate 0.34x cash from its debt capital.
Can ABX meet its short-term obligations with the cash in hand?
Looking at ABX’s US$1.5b in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$4.1b, with a current ratio of 2.65x. Usually, for Metals and Mining companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ABX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 54%, ABX can be considered as an above-average leveraged company. 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. However, since ABX is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although ABX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for ABX's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Barrick Gold to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ABX’s future growth? Take a look at our free research report of analyst consensus for ABX’s outlook.
- Valuation: What is ABX 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 ABX 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.
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.