Why Rio Tinto’s financial condition is stable

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Rio’s financial condition

Net debt is the total debt less cash and cash equivalents. Rio Tinto’s (or RIO) net debt at the end of June 2014 was $16.1 billion. The company reduced its net debt from $22.1 billion on June 30, 2013, to $16.1 billion on June 30, 2014. This is in line with the company’s mid-teens target.

Net debt to EBITDA

Net debt to EBITDA

The above chart shows that Rio Tinto is in a comfortable position as far as the debt to earnings before interest, tax, depreciation, and amortization (or EBITDA) position is concerned.

The debt to EBITDA ratio is a common metric that’s used by credit rating agencies to assess the probability of default on issued debt. A higher number suggests that a firm may not be able to service its debt.

It’s peers—including BHP Billiton (BHP) and Vale SA (VALE)—are also in a comfortable position regarding debt to EBITDA. However, smaller and less diversified players—Cliffs Natural Resources (CLF) and Fortescue Metals Group (or FSUGY)—might be in trouble if iron ore prices remain low for long.

Investors can also consider investing in exchange-traded funds (or ETFs) that invest in the metals and mining sector—like the SPDR S&P Metals & Mining ETF (XME).

Credit rating

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Rio Tinto has an A or A3 rating. It has stable outlook from Standard & Poor’s and Moody’s. Credit rating agencies are continually assessing the situation in regards to lower commodity price outlook. This led Standard & Poor’s and Moody’s to downgrade CLF’s rating to BB- or Ba1 with negative outlook.

Click here to learn about key indicators in the iron ore industry.

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