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The size of Global Payments Inc. (NYSE:GPN), a US$25b large-cap, often attracts investors seeking a reliable investment in the stock market. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Global Payments’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into GPN here.
GPN’s Debt (And Cash Flows)
Over the past year, GPN has ramped up its debt from US$4.7b to US$6.2b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.3b to keep the business going. On top of this, GPN has generated US$1.1b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17%, indicating that GPN’s current level of operating cash is not high enough to cover debt.
Does GPN’s liquid assets cover its short-term commitments?
Looking at GPN’s US$4.5b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is GPN’s debt level acceptable?
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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For GPN, the ratio of 4.32x suggests that interest is appropriately covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes GPN and other large-cap investments thought to be safe.
GPN’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. 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:
- 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.
- 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.
- 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 firstname.lastname@example.org. 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.