What does Canadian Pacific Railway Limited’s (TSE:CP) Balance Sheet Tell Us About Its Future?

Investors pursuing a solid, dependable stock investment can often be led to Canadian Pacific Railway Limited (TSE:CP), a large-cap worth CA$36b. 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 Canadian Pacific Railway’s financial liquidity and leverage to give you an idea of Canadian Pacific Railway’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CP here.

See our latest analysis for Canadian Pacific Railway

How much cash does CP generate through its operations?

CP’s debt level has been constant at around CA$8.3b over the previous year which accounts for long term debt. At this current level of debt, CP currently has CA$150m remaining in cash and short-term investments , ready to deploy into the business. Additionally, CP has produced cash from operations of CA$2.5b during the same period of time, leading to an operating cash to total debt ratio of 30%, meaning that CP’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 CP’s case, it is able to generate 0.3x cash from its debt capital.

Can CP pay its short-term liabilities?

With current liabilities at CA$1.7b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.68x.

TSX:CP Historical Debt December 10th 18
TSX:CP Historical Debt December 10th 18

Is CP’s debt level acceptable?

Since equity is smaller than total debt levels, Canadian Pacific Railway is considered to have high leverage. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. By measuring how many times CP’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 CP, the ratio of 6.59x 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 CP is a safe investment.

Next Steps:

Although CP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though 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 CP has been performing in the past. I recommend you continue to research Canadian Pacific Railway to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CP’s future growth? Take a look at our free research report of analyst consensus for CP’s outlook.
  2. Valuation: What is CP 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 CP 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 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 editorial-team@simplywallst.com.