Is Neste Oyj (HEL:NESTE) As Strong As Its Balance Sheet Indicates?

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Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Neste Oyj (HEL:NESTE). With a market valuation of €23b, NESTE is a safe haven in times of market uncertainty due to its strong balance sheet. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Assessing the most recent data for NESTE, I will take you through the key ratios to measure financial health, in particular, its solvency and liquidity.

Check out our latest analysis for Neste Oyj

Does NESTE Produce Much Cash Relative To Its Debt?

Over the past year, NESTE has ramped up its debt from €1.2b to €1.4b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €1.3b , ready to be used for running the business. Additionally, NESTE has produced €1.2b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 90%, meaning that NESTE’s current level of operating cash is high enough to cover debt.

Can NESTE pay its short-term liabilities?

At the current liabilities level of €2.1b, it seems that the business has been able to meet these obligations given the level of current assets of €4.3b, with a current ratio of 2.05x. The current ratio is the number you get when you divide current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

Is NESTE’s debt level acceptable?

NESTE’s level of debt is appropriate relative to its total equity, at 28%. NESTE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether NESTE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For NESTE, the ratio of 32.57x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes NESTE and other large-cap investments thought to be safe.

Next Steps:

NESTE has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NESTE's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Neste Oyj to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for NESTE’s future growth? Take a look at our free research report of analyst consensus for NESTE’s outlook.
2. Valuation: What is NESTE 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 NESTE 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.