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What Investors Should Know About Magna International Inc.’s (TSE:MG) Financial Strength

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The size of Magna International Inc. (TSE:MG), a CA$22b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to their continued success lies in its financial health. This article will examine Magna International’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into MG here.

View our latest analysis for Magna International

How does MG’s operating cash flow stack up against its debt?

Over the past year, MG has ramped up its debt from US$3.7b to US$4.6b – this includes long-term debt. With this growth in debt, MG’s cash and short-term investments stands at US$884m , ready to deploy into the business. On top of this, MG has produced US$3.6b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 77%, indicating that MG’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In MG’s case, it is able to generate 0.77x cash from its debt capital.

Does MG’s liquid assets cover its short-term commitments?

At the current liabilities level of US$11b, it seems that the business has been able to meet these commitments with a current assets level of US$13b, leading to a 1.19x current account ratio. For Auto Components 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.

TSX:MG Historical Debt February 10th 19
TSX:MG Historical Debt February 10th 19

Can MG service its debt comfortably?

MG is a relatively highly levered company with a debt-to-equity of 40%. 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. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For MG, the ratio of 33.2x suggests that interest is amply covered. Large-cap investments like MG 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 MG’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. Since there is also no concerns around MG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure MG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Magna International to get a better picture of the large-cap by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for MG’s future growth? Take a look at our free research report of analyst consensus for MG’s outlook.

  2. Valuation: What is MG 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 MG is currently mispriced by the market.

  3. 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.