Is Enbridge Inc’s (TSE:ENB) Balance Sheet A Threat To Its Future?
The size of Enbridge Inc (TSE:ENB), a CA$81b large-cap, often attracts investors seeking a reliable investment in the stock market. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. I will provide an overview of Enbridge’s financial liquidity and leverage to give you an idea of Enbridge’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 ENB here.
View our latest analysis for Enbridge
How much cash does ENB generate through its operations?
ENB has sustained its debt level by about CA$64b over the last 12 months which accounts for long term debt. At this constant level of debt, ENB currently has CA$692m remaining in cash and short-term investments , ready to deploy into the business. On top of this, ENB has produced CA$9.3b in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 15%, signalling that ENB’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ENB’s case, it is able to generate 0.15x cash from its debt capital.
Can ENB pay its short-term liabilities?
With current liabilities at CA$13b, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$7.8b, leading to a current ratio of 0.59x.
Is ENB’s debt level acceptable?
With debt reaching 88% of equity, ENB may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times ENB’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ENB’s case, the ratio of 2.48x suggests that interest is not strongly covered. Given the sheer size of Enbridge, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to ENB.
Next Steps:
ENB’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. Keep in mind I haven’t considered other factors such as how ENB has been performing in the past. I suggest you continue to research Enbridge to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ENB’s future growth? Take a look at our free research report of analyst consensus for ENB’s outlook.
Valuation: What is ENB 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 ENB 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 editorial-team@simplywallst.com.
