Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Hess Corporation (NYSE:HES) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Hess’s financial liquidity and leverage to give you an idea of Hess’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into HES here.
HES’s Debt (And Cash Flows)
HES has sustained its debt level by about US$6.7b over the last 12 months which accounts for long term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$2.7b to keep the business going. Moreover, HES has generated cash from operations of US$1.9b during the same period of time, resulting in an operating cash to total debt ratio of 29%, signalling that HES’s debt is appropriately covered by operating cash.
Does HES’s liquid assets cover its short-term commitments?
Looking at HES’s US$2.2b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$4.5b, leading to a 2.02x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HES face the risk of succumbing to its debt-load?
HES is a relatively highly levered company with a debt-to-equity of 61%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. But since HES is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although HES’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for HES’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Hess to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HES’s future growth? Take a look at our free research report of analyst consensus for HES’s outlook.
- Valuation: What is HES 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 HES 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.
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