Are TELUS Corporation's (TSE:T) Interest Costs Too High?

By
Simply Wall St
Published
August 27, 2018
TSX:T
Source: Shutterstock

The size of TELUS Corporation (TSE:T), a CA$28.97b 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. However, the key to their continued success lies in its financial health. Today we will look at TELUS’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into T here.

Check out our latest analysis for TELUS

Does T produce enough cash relative to debt?

Over the past year, T has maintained its debt levels at around CA$14.32b – this includes both the current and long-term debt. At this stable level of debt, T currently has CA$683.0m remaining in cash and short-term investments for investing into the business. On top of this, T has produced cash from operations of CA$4.16b during the same period of time, leading to an operating cash to total debt ratio of 29.0%, signalling that T’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In T’s case, it is able to generate 0.29x cash from its debt capital.

Can T meet its short-term obligations with the cash in hand?

Looking at T’s most recent CA$4.61b liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CA$3.93b, leading to a 0.85x current account ratio. which is under the appropriate industry ratio of 3x.

TSX:T Historical Debt August 27th 18
TSX:T Historical Debt August 27th 18

Does T face the risk of succumbing to its debt-load?

Since equity is smaller than total debt levels, TELUS is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. The sustainability of T’s debt levels can be assessed by comparing the company’s interest payments to earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For T, the ratio of 4.61x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as T is a safe investment.

Next Steps:

Although T’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. 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 T's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research TELUS to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for T’s future growth? Take a look at our free research report of analyst consensus for T’s outlook.
  2. Valuation: What is T 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 T 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.

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 editorial-team@simplywallst.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.

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