There are a number of reasons that attract investors towards large-cap companies such as Packaging Corporation of America (NYSE:PKG), with a market cap of US$9.7b. 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. But, the key to extending previous success is in the health of the company’s financials. Today we will look at Packaging of America’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PKG here.
Does PKG Produce Much Cash Relative To Its Debt?
PKG's debt levels have fallen from US$2.7b to US$2.5b over the last 12 months , which also accounts for long term debt. With this debt payback, PKG currently has US$362m remaining in cash and short-term investments to keep the business going. On top of this, PKG has produced cash from operations of US$1.2b during the same period of time, resulting in an operating cash to total debt ratio of 47%, signalling that PKG’s current level of operating cash is high enough to cover debt.
Can PKG meet its short-term obligations with the cash in hand?
With current liabilities at US$694m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.05x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can PKG service its debt comfortably?
With a debt-to-equity ratio of 94%, PKG can be considered as an above-average leveraged company. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. By measuring how many times PKG’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. For PKG, the ratio of 14.08x suggests that interest is amply covered. Large-cap investments like PKG are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
Although PKG’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 PKG's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure PKG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Packaging of America to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PKG’s future growth? Take a look at our free research report of analyst consensus for PKG’s outlook.
- Valuation: What is PKG 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 PKG 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.