Yahoo Finance What You Must Know About Occidental Petroleum Corporation’s (NYSE:OXY) Financial Strength
There are a number of reasons that attract investors towards large-cap companies such as Occidental Petroleum Corporation (NYSE:OXY), with a market cap of US$53b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to extending previous success is in the health of the company’s financials. Today we will look at Occidental Petroleum’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 information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into OXY here.
View our latest analysis for Occidental Petroleum
Does OXY produce enough cash relative to debt?
Over the past year, OXY has maintained its debt levels at around US$10b including long-term debt. At this stable level of debt, OXY’s cash and short-term investments stands at US$3.0b , ready to deploy into the business. Additionally, OXY has generated cash from operations of US$6.7b in the last twelve months, resulting in an operating cash to total debt ratio of 65%, signalling that OXY’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OXY’s case, it is able to generate 0.65x cash from its debt capital.
Can OXY pay its short-term liabilities?
Looking at OXY’s US$8.4b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Generally, for Oil and Gas companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can OXY service its debt comfortably?
With debt reaching 48% of equity, OXY may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of OXY’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For OXY, the ratio of 17.29x suggests that interest is amply covered. Large-cap investments like OXY are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
Although OXY’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how OXY has been performing in the past. I suggest you continue to research Occidental Petroleum to get a better picture of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for OXY’s future growth? Take a look at our free research report of analyst consensus for OXY’s outlook.
Valuation: What is OXY 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 OXY 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
