A market capitalization of CAD CA$43.49B puts TransCanada Corporation (NYSE:TRP) in the basket of stocks categorized as large-caps. These stocks draw significant attention from the investing community due to its size and liquidity. However, a more fundamental aspect of investing in large caps is its financial health. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for TransCanada
Can TRP service its debt comfortably?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. TRP’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. 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 (EBIT) at least three times its interest payments is considered financially sound. In TRP’s case, its interest is not sufficiently covered by its profits as the ratio is 2.28x. Lenders may be more reluctant to lend out more funding as TRP’s low interest coverage already puts the company at higher risk of default.
Does TRP generate an acceptable amount of cash through operations?
A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This also assesses TRP’s debt repayment capacity, which is not a big concern for a large company. In the case of TRP, operating cash flow turned out to be 0.12x its debt level over the past twelve months. A ratio of over 0.1x shows that TRP is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Are you a shareholder? TRP’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think TRP can improve in terms of debt management and operational efficiency. Since TRP’s capital structure could change over time, You should continue researching market expectations for TRP’s future growth on our free analysis platform.
Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. Ultimately, debt financing is an important source of funding for companies seeking to grow through new projects and investments. This is why You should continue to assess TRP’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.