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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as The Southern Company (NYSE:SO) a safer option. 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. Let’s take a look at Southern’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into SO here.
SO’s Debt (And Cash Flows)
SO has shrunk its total debt levels in the last twelve months, from US$52b to US$46b , which includes long-term debt. With this debt payback, SO’s cash and short-term investments stands at US$1.4b , ready to be used for running the business. Additionally, SO has generated cash from operations of US$6.2b in the last twelve months, resulting in an operating cash to total debt ratio of 13%, meaning that SO’s operating cash is less than its debt.
Can SO meet its short-term obligations with the cash in hand?
Looking at SO’s US$9.9b in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of US$8.7b, leading to a current ratio of 0.88x. The current ratio is the number you get when you divide current assets by current liabilities.
Does SO face the risk of succumbing to its debt-load?
Considering Southern’s total debt outweighs its equity, the company is deemed 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 SO’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SO’s case, the ratio of 2.12x suggests that interest is not strongly covered. The sheer size of Southern means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as SO’s low interest coverage already puts the company in a risky position.
With a high level of debt on its balance sheet, SO could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for SO to increase its operational efficiency. In addition to this, 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 SO has been performing in the past. I recommend you continue to research Southern to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SO’s future growth? Take a look at our free research report of analyst consensus for SO’s outlook.
- Valuation: What is SO 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 SO 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 email@example.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.