How Financially Strong Is Kinder Morgan Inc (NYSE:KMI)?
Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Kinder Morgan Inc (NYSE:KMI) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. However, the key to their continued success lies in its financial health. Today we will look at Kinder Morgan’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into KMI here. See our latest analysis for Kinder Morgan
Does KMI produce enough cash relative to debt?
KMI has shrunken its total debt levels in the last twelve months, from $43,304.0M to $40,138.0M , which comprises of short- and long-term debt. With this debt payback, KMI’s cash and short-term investments stands at $778.0M for investing into the business. On top of this, KMI has produced $4,787.0M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 11.93%, indicating that KMI’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In KMI’s case, it is able to generate 0.12x cash from its debt capital.
Can KMI pay its short-term liabilities?
Looking at KMI’s most recent $5,924.0M liabilities, the company has not been able to meet these commitments with a current assets level of $3,229.0M, leading to a 0.55x current account ratio. which is under the appropriate industry ratio of 3x.
Can KMI service its debt comfortably?
Since equity is smaller than total debt levels, Kinder Morgan is considered to have high leverage. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if KMI’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For KMI, the ratio of 2.07x suggests that interest is not strongly covered. The sheer size of Kinder Morgan means it is unlikely to default or announce bankruptcy anytime soon. However, lenders may be more reluctant to lend out more funding as KMI’s low interest coverage already puts the company in a risky position.
Next Steps:
With a high level of debt on its balance sheet, KMI could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for KMI to increase its operational efficiency. In addition to this, 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 KMI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Kinder Morgan to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for KMI’s future growth? Take a look at our free research report of analyst consensus for KMI’s outlook.
2. Valuation: What is KMI 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 KMI is currently mispriced by the market.
3. 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.
