Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Pembina Pipeline Corporation (TSE:PPL) a safer option. 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 their continued success lies in its financial health. I will provide an overview of Pembina Pipeline’s financial liquidity and leverage to give you an idea of Pembina Pipeline’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 PPL here.
Does PPL produce enough cash relative to debt?
PPL has built up its total debt levels in the last twelve months, from CA$4.82b to CA$7.47b , which comprises of short- and long-term debt. With this growth in debt, PPL’s cash and short-term investments stands at CA$81.00m for investing into the business. On top of this, PPL has produced cash from operations of CA$1.93b in the last twelve months, resulting in an operating cash to total debt ratio of 25.79%, meaning that PPL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PPL’s case, it is able to generate 0.26x cash from its debt capital.
Can PPL meet its short-term obligations with the cash in hand?
Looking at PPL’s most recent CA$1.45b liabilities, the company is not able to meet these obligations given the level of current assets of CA$844.00m, with a current ratio of 0.58x below the prudent level of 3x.
Does PPL face the risk of succumbing to its debt-load?
With debt reaching 53.19% of equity, PPL may be thought of as relatively highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. We can check to see whether PPL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In PPL’s case, the ratio of 5.07x suggests that interest is well-covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as PPL is a safe investment.
PPL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure PPL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pembina Pipeline to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PPL’s future growth? Take a look at our free research report of analyst consensus for PPL’s outlook.
- Valuation: What is PPL 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 PPL 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.