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Enbridge Inc. (TSE:ENB), a large-cap worth CA$100b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, the health of the financials determines whether the company continues to succeed. I will provide an overview of Enbridge’s financial liquidity and leverage to give you an idea of Enbridge’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into ENB here.
Does ENB Produce Much Cash Relative To Its Debt?
ENB’s debt level has been constant at around CA$67b over the previous year including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CA$709m , ready to be used for running the business. On top of this, ENB has produced cash from operations of CA$9.5b over the same time period, leading to an operating cash to total debt ratio of 14%, indicating that ENB’s current level of operating cash is not high enough to cover debt.
Can ENB meet its short-term obligations with the cash in hand?
With current liabilities at CA$13b, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$8.4b, leading to a current ratio of 0.64x. The current ratio is calculated by dividing current assets by current liabilities.
Can ENB service its debt comfortably?
With debt reaching 91% of equity, ENB may be thought of as relatively highly levered. This isn’t uncommon for large companies because interest payments on debt are tax deductible, meaning debt can be a cheaper source of capital than equity. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether ENB is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In ENB’s case, the ratio of 2.76x suggests that interest is not strongly covered. Given the sheer size of Enbridge, it’s unlikely to default on interest payments and enter bankruptcy. However, compared to an amply profitable large-cap peer, debtors may see more risk in lending to ENB.
With a high level of debt on its balance sheet, ENB could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for ENB to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how ENB has been performing in the past. I recommend you continue to research Enbridge to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ENB’s future growth? Take a look at our free research report of analyst consensus for ENB’s outlook.
- Valuation: What is ENB 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 ENB 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 email@example.com. 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.