U.S. Markets closed

Is Global Payments Inc.'s (NYSE:GPN) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Global Payments Inc. (NYSE:GPN), a large-cap worth US$25b, 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. But, the key to their continued success lies in its financial health. Let’s take a look at Global Payments’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GPN here.

View our latest analysis for Global Payments

Does GPN Produce Much Cash Relative To Its Debt?

Over the past year, GPN has ramped up its debt from US$4.7b to US$6.2b – this includes long-term debt. With this rise in debt, GPN's cash and short-term investments stands at US$1.3b to keep the business going. Moreover, GPN has generated US$1.1b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 17%, signalling that GPN’s debt is not covered by operating cash.

Does GPN’s liquid assets cover its short-term commitments?

At the current liabilities level of US$4.5b, it seems that the business has been able to meet these commitments with a current assets level of US$4.7b, leading to a 1.03x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:GPN Historical Debt, June 24th 2019

Does GPN face the risk of succumbing to its debt-load?

With total debt exceeding equities, Global Payments is considered a highly levered company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. 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 GPN’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 GPN's case, the ratio of 4.32x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as GPN is a safe investment.

Next Steps:

At its current level of cash flow coverage, GPN has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure GPN has company-specific issues impacting its capital structure decisions. You should continue to research Global Payments to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for GPN’s future growth? Take a look at our free research report of analyst consensus for GPN’s outlook.
  2. Valuation: What is GPN 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 GPN 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.