Yahoo Finance All You Need To Know About Rio Tinto plc’s (LON:RIO) Financial Health
Investors looking for stocks with high market liquidity and little debt on the balance sheet should consider Rio Tinto plc (LON:RIO). With a market valuation of UK£60.15b, RIO is a safe haven in times of market uncertainty due to its strong balance sheet. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for RIO, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
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$15.36b to US$12.91b over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, RIO’s cash and short-term investments stands at US$8.14b , ready to deploy into the business. Additionally, RIO has produced cash from operations of US$12.81b during the same period of time, resulting in an operating cash to total debt ratio of 99.2%, indicating that RIO’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RIO’s case, it is able to generate 0.99x cash from its debt capital.
Does RIO’s liquid assets cover its short-term commitments?
At the current liabilities level of US$10.65b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$17.63b, with a current ratio of 1.66x. Generally, for Metals and Mining companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does RIO face the risk of succumbing to its debt-load?
With debt at 26.6% of equity, RIO may be thought of as appropriately levered. RIO is not taking on too much debt commitment, which may be constraining for future growth. We can test if RIO’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RIO’s case, the ratio of 28.3x 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’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn’t a big surprise for a large-cap. This is only a rough assessment of financial health, and I’m sure RIO has company-specific issues impacting its capital structure decisions. You should 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 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.
