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.

The quick ratio or acid test ratio is also referred to as the cash ratio in which only liquid assets such as cash are considered.

That said, liquidity is the most important aspect 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.

Therefore, let’s find out Altria’s liquidity from the following topics!

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 or cash 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

Let’s first look at Altria’s current ratio which is shown in the chart above for the period from fiscal 2017 to 2021.

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

For instance, Altria’s current ratio averaged only 0.70X for the past 4 years and the ratio stood at only 0.70X as of 2021 3Q.

Prior to 2021, Altria’s current ratio even dived to as low as 0.20X in Q4 2018, indicating that the company might be on the brink of a liquidity crisis.

Keep in mind that when the current ratio plunges below 1.0X, 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 cash flow to check on the firm’s cash position.

Altria’s Working Capital

Altria working capital

Similarly, Altria’s working capital also has 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 fiscal 2017 and 2021.

As of 3Q 2021, 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 it through?

Altria’s Quick Ratio (Cash Ratio)

Altria 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 or cash ratio.

As shown in the chart above, Altria’s quick ratio has been way below 1.0 in all quarters between fiscal 2017 and 2021.

As of 3Q 2021, Altria’s quick ratio totaled only 0.55X, which was well below the minimum requirement of 1.0X.

At only 0.55X, Altria’s liquidity may seem like a crisis as the company’s total cash is not sufficient to cover the coming liabilities.

Therefore, how did the company pull through the low liquidity level all these years?

Altria’s Credit Line

How is Altria covering the shortfall in the liquidity ratio that we have seen so far?

While Altria may not have sufficient liquid assets on the balance sheets to repay all liabilities, the company does have access to the credit market from time to time to obtain the necessary cash to cover the liquidity shortfall.

For example, Altria has a credit line of as much as $3 billion as of fiscal Q3 2021 under a 5-year revolving credit agreement.

While Altria may not necessarily need to borrow as much as $3 billion in most cases, the company did a full drawdown of its entire $3 billion credit line in March 2020 when the COVID-19 pandemic just started to hit.

According to Altria, the approach was a precautionary measure intended to maintain its financial flexibility due to many uncertainties at that time.

When the capital market did not turn out to be as bad as the company anticipated, Altria repaid in full the $3 billion borrowing in June 2020.

Therefore, the fact here is that Altria has access to the capital market whenever it needs to obtain the necessary cash to meet its working capital requirement.

And Altria’s $3 billion credit line is more than enough to meet its $2 billion working capital deficit.

Altria’s Net Cash Provided By Operating Activities

Altria net cash flow from operating activities

Aside from the available credit line, Altria also generates a substantial amount of operating net cash as shown in the chart above.

Keep in mind that these are net cash from operating activities which means working capital has already been accounted for.

Therefore, Altria generates excess cash totaling at least $7 billion on a TTM basis every quarter as shown in the chart above.

Since Altria is a cash cow, the company can afford to keep its current assets to the minimum, thereby driving the liquidity ratios to record lows.

At the same time, Altria is using the excess cash generated from operations to pay down debt, buy back shares and pay cash dividends.

All in all, Altria is a solid company despite the low liquidity ratios.

Conclusion

In summary, Altria’s liquidity ratios have been at record lows as reflected in the current ratio, working capital and quick ratio which have all been significantly below 1.0X, the minimum threshold for healthy liquidity.

While Altria may seem like not have sufficient liquid assets to cover the coming liabilities, the company actually can afford to carry as little working capital as possible.

In this aspect, Altria has a credit line totaling as much as $3 billion as of fiscal Q3 2021.

More importantly, the company’s available credit line still came in at $3 billion as of fiscal Q3 2021, indicating that Altria has not taken a single dime out of the credit facility.

Moreover, Altria also generates a substantial amount of net cash from operations, meaning that most working capital has already been accounted for before arriving at the net cash which averages around $7 billion on a TTM basis.

Altria returns the excess cash to stockholders in the form of shares buyback and cash dividends.

In short, there is very little cause for concern for Altria’s low liquidity ratios.

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. 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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