Does Williams Partners LP’s (NYSE:WPZ) Debt Level Pose A Problem?
Investors pursuing a solid, dependable stock investment can often be led to Williams Partners LP (NYSE:WPZ), a large-cap worth US$40.44b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. I will provide an overview of Williams Partners’s financial liquidity and leverage to give you an idea of Williams Partners’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into WPZ here. Check out our latest analysis for Williams Partners
How does WPZ’s operating cash flow stack up against its debt?
WPZ’s debt levels have fallen from US$18.56b to US$16.50b over the last 12 months , which is made up of current and long term debt. With this debt repayment, WPZ currently has US$881.00m remaining in cash and short-term investments for investing into the business. Additionally, WPZ has produced cash from operations of US$2.84b during the same period of time, resulting in an operating cash to total debt ratio of 17.22%, meaning that WPZ’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In WPZ’s case, it is able to generate 0.17x cash from its debt capital.
Can WPZ pay its short-term liabilities?
With current liabilities at US$2.45b, it appears that the company has not been able to meet these commitments with a current assets level of US$2.14b, leading to a 0.87x current account ratio. which is under the appropriate industry ratio of 3x.
Is WPZ’s debt level acceptable?
With debt reaching 75.01% of equity, WPZ may be thought of as relatively highly levered. 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 an advantage over small-caps through lower cost of capital due to cheaper financing. We can check to see whether WPZ is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In WPZ’s case, the ratio of 2.26x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Williams Partners defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.
Next Steps:
WPZ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure WPZ has company-specific issues impacting its capital structure decisions. You should continue to research Williams Partners to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for WPZ’s future growth? Take a look at our free research report of analyst consensus for WPZ’s outlook.
Valuation: What is WPZ 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 WPZ 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 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.
