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The size of Aker BP ASA (OB:AKERBP), a øre97b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Aker BP’s financial liquidity and leverage to give you an idea of Aker BP’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into AKERBP here.
Does AKERBP Produce Much Cash Relative To Its Debt?
Over the past year, AKERBP has reduced its debt from US$3.1b to US$2.6b , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$114m , ready to be used for running the business. On top of this, AKERBP has produced US$3.8b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 145%, signalling that AKERBP’s debt is appropriately covered by operating cash.
Does AKERBP’s liquid assets cover its short-term commitments?
At the current liabilities level of US$1.4b, the company may not have an easy time meeting these commitments with a current assets level of US$619m, leading to a current ratio of 0.43x. The current ratio is calculated by dividing current assets by current liabilities.
Does AKERBP face the risk of succumbing to its debt-load?
With debt reaching 94% of equity, AKERBP may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can assess the sustainability of AKERBP’s debt levels to the test by looking at how well interest payments are covered by earnings. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For AKERBP, the ratio of 22.52x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes AKERBP and other large-cap investments thought to be safe.
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 lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for AKERBP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Aker BP to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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.