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Evonik Industries AG (FRA:EVK), a large-cap worth €12b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These companies are resilient in times of low liquidity and are not as strongly impacted by interest rate hikes as companies with lots of debt. Today I will analyse the latest financial data for EVK to determine is solvency and liquidity and whether the stock is a sound investment.
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See our latest analysis for Evonik Industries
Can EVK service its debt comfortably?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. For EVK, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors' risk associated with debt is virtually non-existent with EVK, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Does EVK’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Evonik Industries has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. Looking at EVK’s €4.3b in current liabilities, the company has been able to meet these obligations given the level of current assets of €7.0b, with a current ratio of 1.65x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
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EVK has no debt as well as ample cash to cover its short-term liabilities. Its strong balance sheet reduces risk for the company and its investors. Keep in mind I haven't considered other factors such as how EVK has performed in the past. I suggest you continue to research Evonik Industries to get a better picture of the stock by looking at: