Fortis Inc. (TSE:FTS), a large-cap worth CA$20b, comes to mind for investors seeking a strong and reliable stock investment. 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. I will provide an overview of Fortis’s financial liquidity and leverage to give you an idea of Fortis’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into FTS here.
How much cash does FTS generate through its operations?
Over the past year, FTS has ramped up its debt from CA$22b to CA$25b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$332m , ready to deploy into the business. On top of this, FTS has produced cash from operations of CA$2.6b during the same period of time, resulting in an operating cash to total debt ratio of 11%, meaning that FTS’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In FTS’s case, it is able to generate 0.11x cash from its debt capital.
Can FTS meet its short-term obligations with the cash in hand?
Looking at FTS’s CA$4.3b in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of CA$3.3b, with a current ratio of 0.77x.
Can FTS service its debt comfortably?
Considering Fortis’s total debt outweighs its equity, the company is deemed highly levered. 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. By measuring how many times FTS’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In FTS’s case, the ratio of 2.39x suggests that interest is not strongly covered. Given the sheer size of Fortis, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to FTS.
With a high level of debt on its balance sheet, FTS could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for FTS to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. I admit this is a fairly basic analysis for FTS’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Fortis to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FTS’s future growth? Take a look at our free research report of analyst consensus for FTS’s outlook.
- Valuation: What is FTS 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 FTS 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.
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 firstname.lastname@example.org. 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.