Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as LyondellBasell Industries N.V. (NYSE:LYB) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. I will provide an overview of LyondellBasell Industries’s financial liquidity and leverage to give you an idea of LyondellBasell Industries’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 LYB here.
LYB’s Debt (And Cash Flows)
Over the past year, LYB has ramped up its debt from US$8.7b to US$9.4b , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at US$1.3b to keep the business going. Moreover, LYB has generated US$5.5b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 58%, indicating that LYB’s debt is appropriately covered by operating cash.
Can LYB pay its short-term liabilities?
At the current liabilities level of US$5.5b, the company has been able to meet these obligations given the level of current assets of US$11b, with a current ratio of 1.92x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is LYB’s debt level acceptable?
LYB is a relatively highly levered company with a debt-to-equity of 91%. 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. By measuring how many times LYB’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For LYB, the ratio of 16.9x suggests that interest is amply covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes LYB and other large-cap investments thought to be safe.
LYB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure LYB has company-specific issues impacting its capital structure decisions. I recommend you continue to research LyondellBasell Industries to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LYB’s future growth? Take a look at our free research report of analyst consensus for LYB’s outlook.
- Valuation: What is LYB 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 LYB 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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