International Paper Company (NYSE:IP), a large-cap worth US$18b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. However, the key to extending previous success is in the health of the company’s financials. Let’s take a look at International Paper’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into IP here.
How much cash does IP generate through its operations?
Over the past year, IP has maintained its debt levels at around US$11b which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$589m , ready to deploy into the business. Additionally, IP has produced cash from operations of US$3.2b during the same period of time, leading to an operating cash to total debt ratio of 30%, meaning that IP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In IP’s case, it is able to generate 0.3x cash from its debt capital.
Can IP pay its short-term liabilities?
With current liabilities at US$4.7b, it seems that the business has been able to meet these obligations given the level of current assets of US$7.0b, with a current ratio of 1.49x. Usually, for Packaging companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does IP face the risk of succumbing to its debt-load?
International Paper is a highly levered company given that total debt exceeds equity. 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. The sustainability of IP’s debt levels can be assessed by comparing the company’s interest payments to earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For IP, the ratio of 4.6x suggests that interest is well-covered. Large-cap investments like IP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although IP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around IP’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how IP has been performing in the past. I suggest you continue to research International Paper to get a better picture of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IP’s future growth? Take a look at our free research report of analyst consensus for IP’s outlook.
- Valuation: What is IP 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 IP 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.
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