Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Praxair Inc (NYSE:PX) a safer option. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. However, the key to extending previous success is in the health of the company’s financials. This article will examine Praxair’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into PX here. View out our latest analysis for Praxair
Does PX produce enough cash relative to debt?
PX’s debt levels have fallen from US$9.37b to US$8.84b over the last 12 months , which is made up of current and long term debt. With this debt payback, PX currently has US$545.00m remaining in cash and short-term investments for investing into the business. On top of this, PX has produced US$3.02b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 34.14%, signalling that PX’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PX’s case, it is able to generate 0.34x cash from its debt capital.
Can PX meet its short-term obligations with the cash in hand?
At the current liabilities level of US$3.53b liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.94x, which is below the prudent industry ratio of 3x.
Does PX face the risk of succumbing to its debt-load?
Since equity is smaller than total debt levels, Praxair is considered to have high leverage. 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. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In PX’s case, the ratio of 15.55x suggests that interest is comfortably covered. Large-cap investments like PX are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
PX’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. This is only a rough assessment of financial health, and I’m sure PX has company-specific issues impacting its capital structure decisions. You should continue to research Praxair to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PX’s future growth? Take a look at our free research report of analyst consensus for PX’s outlook.
- Historical Performance: What has PX’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.