Yahoo Finance What does Rio Tinto plc’s (LON:RIO) Balance Sheet Tell Us About Its Future?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Rio Tinto plc (LSE:RIO) a safer option. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. Today we will look at Rio Tinto’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 RIO here. See our latest analysis for Rio Tinto
How does RIO’s operating cash flow stack up against its debt?
RIO’s debt levels have fallen from US$17.63B to US$15.18B over the last 12 months , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$11.61B for investing into the business. On top of this, RIO has generated US$13.88B in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 91.49%, indicating that RIO’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 RIO’s case, it is able to generate 0.91x cash from its debt capital.
Does RIO’s liquid assets cover its short-term commitments?
With current liabilities at US$11.35B, it appears that the company has been able to meet these obligations given the level of current assets of US$19.17B, with a current ratio of 1.69x. For Metals and Mining companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can RIO service its debt comfortably?
RIO’s level of debt is appropriate relative to its total equity, at 29.69%. RIO is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether RIO is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. In RIO’s case, the ratio of 19.51x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as RIO is a safe investment.
Next Steps:
RIO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. Keep in mind I haven’t considered other factors such as how RIO has been performing in the past. I recommend you continue to research Rio Tinto to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for RIO’s future growth? Take a look at our free research report of analyst consensus for RIO’s outlook.
Valuation: What is RIO 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 RIO 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.
To help readers see pass 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.
