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Investors pursuing a solid, dependable stock investment can often be led to LafargeHolcim Ltd (VTX:LHN), a large-cap worth CHF29b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to their continued success lies in its financial health. This article will examine LafargeHolcim’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 LHN here.
Check out our latest analysis for LafargeHolcim
Does LHN Produce Much Cash Relative To Its Debt?
LHN has shrunk its total debt levels in the last twelve months, from CHF19b to CHF16b , which also accounts for long term debt. With this debt payback, LHN's cash and short-term investments stands at CHF2.5b , ready to be used for running the business. Moreover, LHN has produced CHF3.0b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 19%, indicating that LHN’s operating cash is less than its debt.
Can LHN pay its short-term liabilities?
Looking at LHN’s CHF11b in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of CHF12b, leading to a 1.09x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Basic Materials companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does LHN face the risk of succumbing to its debt-load?
With debt reaching 54% of equity, LHN may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether LHN is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For LHN, the ratio of 5.62x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like LHN are considered a risk-averse investment.