How Financially Strong Is Enterprise Products Partners LP (NYSE:EPD)?
Large-cap companies such as Enterprise Products Partners LP (NYSE:EPD), with a market-capitalization of $56.34B, are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns more comforting than explosive growth potential. But another key factor to consider when investing in EPD is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for Enterprise Products Partners
Does EPD face the risk of succumbing to its debt-load?
Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. EPD’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether EPD’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. In EPD’s case, its interest is excessively covered by its earnings as the ratio sits at 3.44x. Lenders may be less hesitant to lend out more funding as EPD’s high interest coverage is seen as responsible and safe practice.
Does EPD generate enough cash through operations?
A basic way to evaluate EPD’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses EPD’s debt repayment capacity, which is not a big concern for a large company. In the case of EPD, operating cash flow turned out to be 0.17x its debt level over the past twelve months. This means, over a tenth of EPD’s near term debt can be covered by its day-to-day cash income, which somewhat reduces its riskiness to its debtholders.
Next Steps:
Are you a shareholder? EPD’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think EPD can improve in terms of debt management and operational efficiency. Given that EPD’s capital structure could change over time, I recommend exploring market expectations for EPD’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. That’s why I encourage potential investors to look at EPD’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.
