There are a number of reasons that attract investors towards large-cap companies such as Enterprise Products Partners LP (NYSE:EPD), with a market cap of US$60.53b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. However, its financial health remains the key to continued success. This article will examine Enterprise Products Partners’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into EPD here. View out our latest analysis for Enterprise Products Partners
Does EPD produce enough cash relative to debt?
EPD's debt level has been constant at around US$24.57b over the previous year comprising of short- and long-term debt. At this stable level of debt, EPD currently has US$5.10m remaining in cash and short-term investments for investing into the business. On top of this, EPD has produced cash from operations of US$4.67b during the same period of time, leading to an operating cash to total debt ratio of 18.99%, meaning that EPD’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EPD’s case, it is able to generate 0.19x cash from its debt capital.
Can EPD meet its short-term obligations with the cash in hand?
With current liabilities at US$9.30b, it seems that the business has not been able to meet these commitments with a current assets level of US$6.51b, leading to a 0.7x current account ratio. which is under the appropriate industry ratio of 3x.
Is EPD’s debt level acceptable?
Considering Enterprise Products Partners’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus 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 assess the sustainability of EPD’s debt levels to the test by looking at how well interest payments are covered by earnings. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EPD's case, the ratio of 3.64x 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 EPD is a safe investment.
EPD’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, 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 EPD has company-specific issues impacting its capital structure decisions. You should continue to research Enterprise Products Partners to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EPD’s future growth? Take a look at our free research report of analyst consensus for EPD’s outlook.
- Valuation: What is EPD 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 EPD 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.
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