Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Louisiana-Pacific Corporation (NYSE:LPX) with a market-capitalization of US$4.16b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. This article will examine LPX’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. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into LPX here.
Does LPX produce enough cash relative to debt?
LPX has sustained its debt level by about US$375.7m over the last 12 months comprising of short- and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$1.00b , ready to deploy into the business. Additionally, LPX has generated US$580.1m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 154%, indicating that LPX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LPX’s case, it is able to generate 1.54x cash from its debt capital.
Can LPX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$257.5m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.46b, leading to a 5.68x current account ratio. However, anything about 3x may be excessive, since LPX may be leaving too much capital in low-earning investments.
Can LPX service its debt comfortably?
With a debt-to-equity ratio of 21.3%, LPX’s debt level may be seen as prudent. LPX is not taking on too much debt commitment, which may be constraining for future growth. We can test if LPX’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. For LPX, the ratio of 167x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving LPX ample headroom to grow its debt facilities.
LPX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for LPX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Louisiana-Pacific to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LPX’s future growth? Take a look at our free research report of analyst consensus for LPX’s outlook.
- Valuation: What is LPX 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 LPX 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 past 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. For errors that warrant correction please contact the editor at email@example.com.