Yahoo Finance What You Must Know About Cenovus Energy Inc.’s (TSE:CVE) Financial Strength
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Cenovus Energy Inc. (TSE:CVE), a large-cap worth CA$14b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, its financial health remains the key to continued success. Let’s take a look at Cenovus Energy’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into CVE here.
Check out our latest analysis for Cenovus Energy
How does CVE’s operating cash flow stack up against its debt?
CVE has shrunken its total debt levels in the last twelve months, from CA$12b to CA$9.8b , which includes long-term debt. With this reduction in debt, CVE currently has CA$1.9b remaining in cash and short-term investments for investing into the business. Additionally, CVE has generated cash from operations of CA$2.6b over the same time period, resulting in an operating cash to total debt ratio of 26%, meaning that CVE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In CVE’s case, it is able to generate 0.26x cash from its debt capital.
Can CVE meet its short-term obligations with the cash in hand?
Looking at CVE’s CA$4.7b in current liabilities, the company has been able to meet these obligations given the level of current assets of CA$5.9b, with a current ratio of 1.26x. For Oil and Gas companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CVE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 53%, CVE can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. Though, since CVE is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
CVE’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 CVE has been performing in the past. I suggest you continue to research Cenovus Energy to get a more holistic view of the large-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CVE’s future growth? Take a look at our free research report of analyst consensus for CVE’s outlook.
Valuation: What is CVE 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 CVE 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.
