Mid-caps stocks, like Targa Resources Corp. (NYSE:TRGP) with a market capitalization of US$9.8b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at TRGP’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Targa Resources’s financial health, so you should conduct further analysis into TRGP here.
How much cash does TRGP generate through its operations?
TRGP’s debt levels surged from US$5.0b to US$6.0b over the last 12 months – this includes long-term debt. With this growth in debt, TRGP’s cash and short-term investments stands at US$203m , ready to deploy into the business. Moreover, TRGP has generated US$1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 22%, signalling that TRGP’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TRGP’s case, it is able to generate 0.22x cash from its debt capital.
Can TRGP pay its short-term liabilities?
At the current liabilities level of US$2.6b, the company may not be able to easily meet these obligations given the level of current assets of US$1.7b, with a current ratio of 0.68x.
Does TRGP face the risk of succumbing to its debt-load?
With debt reaching 80% of equity, TRGP may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In TRGP’s case, the ratio of 2.52x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
TRGP’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. But, its lack of liquidity raises questions over current asset management practices for the mid-cap. I admit this is a fairly basic analysis for TRGP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Targa Resources to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRGP’s future growth? Take a look at our free research report of analyst consensus for TRGP’s outlook.
- Historical Performance: What has TRGP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 email@example.com.