A market capitalization of USD $15.01B puts MPLX LP (NYSE:MPLX) 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. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for MPLX
Is MPLX’s level of debt at an acceptable level?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. Generally, large-cap stocks are considered financially healthy if its ratio is below 40%. MPLX’s debt-to-equity ratio stands at 63.59%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. While debt-to-equity ratio has several factors at play, an easier way to check whether MPLX’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. MPLX’s interest on debt is sufficiently covered by earnings as it sits at around 3.46x. Lenders may be less hesitant to lend out more funding as MPLX’s high interest coverage is seen as responsible and safe practice.
How does MPLX’s operating cash flow stack up against its debt?
A basic way to evaluate MPLX’s debt management is to see whether the cash flow generated from the business is at a relatively high level compared to the debt capital invested. This also assesses MPLX’s debt repayment capacity, which is not a big concern for a large company. MPLX’s recent operating cash flow was 0.23 times its debt within the past year. A ratio of over 0.1x shows that MPLX is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Are you a shareholder? At its current level of cash flow coverage, investors should ask themselves if they believe MPLX can sustainably improve cash flows to better cushion for events which may require debt repayment. Given that MPLX’s capital structure may change, I recommend exploring market expectations for MPLX’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. Ultimately, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. So, I recommend potential investors to assess MPLX’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.