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Is Altria Low Liquidity A Cause For Concern?

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This article briefly talks about Altria’s (NYSE:MO) liquidity from the perspective of the current ratio, working capital and quick ratio or acid test ratio.

As we all know, liquidity is the most important lifeline of a business and it’s no exception for Altria.

Reading into the liquidity ratios may give us a clue about Altria’s business operations and thus its financial well-being on a very high-level basis.

Let’s get started!

Altria’s Liquidity Ratios

Altria’s liquidity ratios consist of mainly the current ratio, working capital and quick ratio.

The quick ratio also referred to as the acid test ratio, is almost similar to the cash ratio in which only highly liquid assets such as cash and cash equivalents are taken into consideration.

Keep in mind that all of these ratios measure only the short-term liquidity which revolves around Altria’s current assets and current liabilities.

The following equations show how a current ratio and working capital is calculated:

Current Ratio = Current Assets / Current Liabilities

Working Capital = Current Assets – Current Liabilities

The quick ratio is the same as the current ratio but with certain items within the current assets being excluded during the measurement.

Also, a low liquidity ratio does not necessarily mean that Altria’s financial health is at risk and the company will immediately go into bankruptcy.

In this case, investors just need to do a little more work by digging into Altria’s financial reports to find out what is causing the low liquidity ratios.

Altria’s Current Ratio

Altria current ratio

Altria current ratio

* Altria’s current ratio came from the author’s own calculation using the company’s current assets and current liabilities.
* Both current assets and current liabilities are GAAP measures as reported in Altria’s balance sheets.

Let’s first look at Altria’s current ratio which is shown in the chart above for the period from 2017 to 2020.

From the first glimpse, Altria may seem like it has been low on liquidity as reflected in the current ratio that has been below 1.0 for the past 4 years.

For instance, Altria’s current ratio averaged around 0.70 for the past 4 years and the ratio stood at 0.80 as of 2020 4Q.

Altria’s current ratio even dived to as low as 0.20 in Q4 2018, indicating that the company looked like it was on the brink of bankruptcy.

Keep in mind that when the current ratio plunges below 1.0, it means that the company does not have sufficient current assets to pay for the current liabilities that come due within a year.

That said, Altria seemed to be having insufficient current assets all these years.

In cases like these, investors are highly encouraged to dig into Altria’s financial statements to find out the reason behind the low liquidity ratios.

Investigation into Altria’s Financial Reports

A detailed investigation into Altria’s 4Q 2018 balance sheets shows that the company had short-term borrowings that totaled nearly $13 billion and it would be due within a year from the fiscal 2018 Q4 quarter.

Altria 4Q 2018 balance sheets

Altria 4Q 2018 balance sheets

The snapshot above shows that Altria’s total current liabilities reached more than $21 billion in the 4Q 2018 quarter alone, driven mainly by the $13 billion short-term borrowings.

Further reading revealed that Altria borrowed more than $13 billion of debt to finance its investment in JUUL and Cronos as shown in the following quote:

  • On December 20, 2018, Altria entered into the Term Loan Agreement in connection with its investments in JUUL and Cronos.

    The Term Loan Agreement provides for borrowings up to an aggregate principal amount of $14.6 billion and is comprised of:

    (i) a $12.8 billion tranche, which Altria used to finance the JUUL Transaction, and
    (ii) a $1.8 billion tranche, which Altria intends to use to finance its investment in Cronos.

How was Altria going to pay back the short-term borrowings that came due in a year?

While Altria may not have the liquid assets necessary to repay all of the debt that came due in a year as shown in the current ratio of 0.20, Altria stated in its financial report that it would go to the credit and capital market to obtain the required fund to refinance the maturing debt.

  • Although Altria does not currently have the liquid funds necessary to repay all of the $14.9 billion of debt coming due by January 31, 2020, Altria expects to access the credit and capital markets to refinance the debt prior to maturity.

Therefore, Altria has access to the capital markets to obtain the necessary funds to refinancing the short-term borrowings.

Altria’s Working Capital

Altria working capital

Altria working capital

* Altria’s working capital came from the author’s own calculation using the company’s current assets and current liabilities.
* Both current assets and current liabilities are GAAP measures as reported in Altria’s balance sheets.

Similarly, Altria’s working capital has also been having the same trend as its current ratio.

As shown in the plot above, Altria’s working capital has been entirely in the negative region for the past 4 years.

On average, Altria experienced a working capital deficit of as much as $3 billion every quarter between 2017 and 2020.

As of 4Q 2020, Altria’s working capital deficit reached nearly $2 billion in that quarter alone.

Since Altria has been having a negative working capital all these years, how did the company pull through with fewer current assets?

Again, investors need to dig into Altria’s financial reports to look for clues.

In Altria’s 2020 Q4 report, Altria stated that it has the ability to fund working capital deficit with cash provided by operating activities as well as borrowings through its access to credit and capital markets.

In the same quarter, Altria had not had any outstanding borrowings under its Credit Agreement as shown in the following quote extracted from the company’s 2020 Q4 statements:

  • Altria’s Credit Agreement, which is used for general corporate purposes, had $3.0 billion available at December 31, 2020.

Therefore, Altria must have used its cash generated from operating activities to fund the working capital deficit.

Altria’s Net Cash Provided By Operating Activities

Altria net cash flow from operating activities

Altria net cash flow from operating activities

* TTM numbers came from the author’s own calculation and consists of the sum of Altria’s quarterly net cash provided by operating activities on a trailing 12-month or 4-quarter basis.
* Quarterly net cash provided by operating activities is a GAAP measure and is extracted from Altria’s statements of cash flow.

All these years, Altria has been using the cash provided by operating activities to fund its working capital deficit.

The chart above shows that Altria has been generating positive net cash from operating activities that could reach more than $10 billion on a TTM basis.

On average, Altria’s net cash provided by operating activities reached as much as $7.5 billion in any quarter between 2017 and 2020 on a TTM basis.

Keep in mind that the cash shown in the chart above was already the net amount which means the operating cash flow has already taken care of the working capital deficit before arriving at the final amount in the chart above.

In other words, Altria still has net cash from operating activities that totaled as much as $10 billion in some of the quarters even after paying for working capital.

Take a look at the following cash flow from operating activities extracted from Altria’s cash flow statements:

Altria 4Q 2020 cash flow from operating activities

Altria 4Q 2020 cash flow from operating activities

The highlighted portion in the snapshot above shows the working capital portion where the cash flow activities took place.

All in all, Altria is a cash printing machine.

Altria’s Quick Ratio

Altria quick ratio

Altria quick ratio

* Altria’s quick ratio came from the author’s own calculation using the company’s current assets and current liabilities.
* Both current assets and current liabilities are GAAP measures as reported in Altria’s balance sheets.
* Current assets have been adjusted to exclude inventories and other current assets when calculationg the quick ratio.

Altria’s liquidity dived to a new low when only highly liquid current assets such as cash and cash equivalents and accounts receivable are taken into the calculation of the quick ratio.

As shown in the chart above, Altria’s quick ratio has been way below 1.0 in all quarters between 2017 and 2020.

As of 4Q 2020, Altria’s quick ratio stood at 0.56, which was way higher than the average figure of 0.35.

The higher quick ratio throughout 2020 has been mainly driven by Altria’s efforts to enhance its liquidity position in response to the COVID-19 pandemic.

While Altria’s liquidity has improved considerably in 2020, it was only able to cover around 50% of the total current liabilities that came due in a year.

In other words, Altria’s liquid assets alone such as cash and cash equivalents and accounts receivable were way too little to pay for the coming short-term liabilities.

But that’s fine with Altria because the company has been a cash machine that literally prints cash.

As discussed, Altria has been able to use the cash generated from operating activities to fund the working capital deficits as shown in the prior chart.

In short, Altria carries very little working capital when it comes to running its business operations.

This approach may save costs and improve efficiency for Altria.

Conclusion

In summary, Altria’s liquidity ratios were low as shown in the current ratio, working capital and quick ratio.

Altria’s low liquidity environment shows that the company carries as little working capital as possible.

In fact, Altria has been operating with working capital deficits all these years.

However, Altria has been able to fund its working capital deficits with the cash generated from operating activities.

Other than the cash flow from operating activities, Altria also has access to credit and capital markets that provides borrowings as needed to fund its working capital and to refinance its existing debt.

Therefore, there is very little cause for concern for Altria’s low liquidity.

References and Credits

1. All financial data in this article were referenced and obtained directly from Altria’s (NYSE:MO) annual and quarterly reports which can be found in Altria’s Earnings Release.

2. All ratios came from the author’s own calculations.

3. Featured images in this article are used under Creative Commons License and sourced from the following websites: Aaron Yoo and Kelley Minars.

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