Aker BP ASA (OB:AKERBP): Time For A Financial Health Check

Investors pursuing a solid, dependable stock investment can often be led to Aker BP ASA (OB:AKERBP), a large-cap worth øre101b. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. This article will examine Aker BP’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 AKERBP here.

Check out our latest analysis for Aker BP

How does AKERBP’s operating cash flow stack up against its debt?

AKERBP has built up its total debt levels in the last twelve months, from US$2.0b to US$3.0b , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$127m , ready to deploy into the business. Additionally, AKERBP has generated US$2.5b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 82%, meaning that AKERBP’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 AKERBP’s case, it is able to generate 0.82x cash from its debt capital.

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

Looking at AKERBP’s US$3.1b in current liabilities, the company may not be able to easily meet these obligations given the level of current assets of US$2.4b, with a current ratio of 0.78x.

OB:AKERBP Historical Debt January 27th 19
OB:AKERBP Historical Debt January 27th 19

Is AKERBP’s debt level acceptable?

With debt reaching 97% of equity, AKERBP may be thought of as relatively highly levered. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if AKERBP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In AKERBP’s case, the ratio of 20.25x suggests that interest is amply covered. Large-cap investments like AKERBP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.

Next Steps:

Although AKERBP’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. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how AKERBP has been performing in the past. I recommend you continue to research Aker BP to get a more holistic view of the stock by looking at:

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