Keyera Corp (TSX:KEY): Time For A Financial Health Check
Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Keyera Corp (TSX:KEY) with a market-capitalization of CAD CA$6.71B, rarely draw their attention and few analysts cover them. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups, primarily due to seasoned executives running a lean corporate structure. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. View our latest analysis for Keyera
Can KEY service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. KEY’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. While debt-to-equity ratio has several factors at play, an easier way to check whether KEY’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. In KEY’s case, its interest is excessively covered by its earnings as the ratio sits at 6.39x. Lenders may be less hesitant to lend out more funding as KEY’s high interest coverage is seen as responsible and safe practice.
Can KEY pay its short-term liabilities?
Another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare KEY’s cash and other liquid assets against its upcoming debt. Our analysis shows that KEY does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, KEY could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case so investors should ask themselves if they believe KEY can sustainably increase its operational efficiency going forward. Given that KEY’s capital structure could change over time, I suggest assessing market expectations for KEY’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. KEY’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
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.
