Edison International (NYSE:EIX), a large-cap worth US$19b, comes to mind for investors seeking a strong and reliable stock investment. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the health of the financials determines whether the company continues to succeed. I will provide an overview of Edison International’s financial liquidity and leverage to give you an idea of Edison International’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into EIX here.
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Does EIX produce enough cash relative to debt?
EIX has built up its total debt levels in the last twelve months, from US$13b to US$15b , which accounts for long term debt. With this increase in debt, EIX currently has US$71m remaining in cash and short-term investments , ready to deploy into the business. Moreover, EIX has produced cash from operations of US$3.2b over the same time period, leading to an operating cash to total debt ratio of 21%, indicating that EIX’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EIX’s case, it is able to generate 0.21x cash from its debt capital.
Does EIX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$4.7b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$3.4b, with a current ratio of 0.72x.
Does EIX face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Edison International is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In EIX’s case, the ratio of 2.8x suggests that interest is not strongly covered. The sheer size of Edison International means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as EIX’s low interest coverage already puts the company in a risky position.
EIX’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure EIX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Edison International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EIX’s future growth? Take a look at our free research report of analyst consensus for EIX’s outlook.
- Valuation: What is EIX 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 EIX 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 past 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. For errors that warrant correction please contact the editor at firstname.lastname@example.org.