Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Energy Transfer Partners LP (NYSE:ETP) a safer option. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. However, the key to their continued success lies in its financial health. This article will examine Energy Transfer Partners’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending 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 ETP here. See our latest analysis for Energy Transfer Partners
How does ETP’s operating cash flow stack up against its debt?
ETP’s debt level has been constant at around US$33.09b over the previous year – this includes both the current and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$306.00m for investing into the business. Additionally, ETP has generated cash from operations of US$4.49b in the last twelve months, leading to an operating cash to total debt ratio of 13.55%, indicating that ETP’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ETP’s case, it is able to generate 0.14x cash from its debt capital.
Can ETP pay its short-term liabilities?
At the current liabilities level of US$6.99b liabilities, it seems that the business has not been able to meet these commitments with a current assets level of US$6.53b, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Can ETP service its debt comfortably?
With debt reaching 98.26% of equity, ETP may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if ETP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. In ETP’s case, the ratio of 2.63x suggests that interest is not strongly covered. Given the sheer size of Energy Transfer Partners, 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 ETP.
With a high level of debt on its balance sheet, ETP 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 ETP to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for ETP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Energy Transfer Partners to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ETP’s future growth? Take a look at our free research report of analyst consensus for ETP’s outlook.
- Valuation: What is ETP 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 ETP 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 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.