Are Westlake Chemical Partners LP’s (NYSE:WLKP) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Westlake Chemical Partners LP (NYSE:WLKP), with a market cap of US$726.95M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into WLKP here.
How does WLKP’s operating cash flow stack up against its debt?
WLKP has shrunken its total debt levels in the last twelve months, from US$594.63M to US$473.96M , which is made up of current and long term debt. With this debt repayment, WLKP currently has US$27.01M remaining in cash and short-term investments , ready to deploy into the business. On top of this, WLKP has generated cash from operations of US$537.36M over the same time period, resulting in an operating cash to total debt ratio of 113.38%, meaning that WLKP’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 WLKP’s case, it is able to generate 1.13x cash from its debt capital.
Does WLKP’s liquid assets cover its short-term commitments?
Looking at WLKP’s most recent US$40.24M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$231.39M, with a current ratio of 5.75x. Though, a ratio greater than 3x may be considered as too high, as WLKP could be holding too much capital in a low-return investment environment.
Does WLKP face the risk of succumbing to its debt-load?
With debt reaching 47.46% of equity, WLKP may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In WLKP’s case, the ratio of 17.13x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving WLKP ample headroom to grow its debt facilities.
Next Steps:
Although WLKP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure WLKP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Westlake Chemical Partners to get a more holistic view of the small-cap by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for WLKP’s future growth? Take a look at our free research report of analyst consensus for WLKP’s outlook.
2. Valuation: What is WLKP 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 WLKP is currently mispriced by the market.
3. 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 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.
