What You Must Know About Keurig Dr Pepper Inc.'s (NYSE:KDP) Financial Strength
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
The size of Keurig Dr Pepper Inc. (NYSE:KDP), a US$41b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, its financial health remains the key to continued success. I will provide an overview of Keurig Dr Pepper’s financial liquidity and leverage to give you an idea of Keurig Dr Pepper’s position to take advantage of potential acquisitions or comfortably endure future downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into KDP here.
View our latest analysis for Keurig Dr Pepper
Does KDP Produce Much Cash Relative To Its Debt?
KDP has built up its total debt levels in the last twelve months, from US$5.2b to US$16b – this includes long-term debt. With this increase in debt, KDP's cash and short-term investments stands at US$85m to keep the business going. Moreover, KDP has produced US$1.6b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 10%, indicating that KDP’s operating cash is less than its debt.
Can KDP pay its short-term liabilities?
At the current liabilities level of US$5.7b, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$2.2b, with a current ratio of 0.38x. The current ratio is the number you get when you divide current assets by current liabilities.
Does KDP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 71%, KDP can be considered as an above-average leveraged company. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can assess the sustainability of KDP’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In KDP's case, the ratio of 3.77x suggests that interest is appropriately covered. Large-cap investments like KDP are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Next Steps:
KDP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I'm sure KDP has company-specific issues impacting its capital structure decisions. I recommend you continue to research Keurig Dr Pepper to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for KDP’s future growth? Take a look at our free research report of analyst consensus for KDP’s outlook.
Valuation: What is KDP 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 KDP 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 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.
