A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This also assesses RIO’s debt repayment capacity, which is not a big concern for a large company. In the case of RIO, operating cash flow turned out to be 0.75x its debt level over the past twelve months. A ratio of over 0.5x is a positive sign and shows that RIO is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.

Next Steps:

Are you a shareholder? RIO has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Since RIO’s financial situation may change over time, I suggest researching market expectations for RIO’s future growth on our free analysis platform.

Are you a potential investor? While investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I recommend potential investors to examine RIO’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

To help readers see pass 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.