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Investors pursuing a solid, dependable stock investment can often be led to Kansas City Southern (NYSE:KSU), a large-cap worth US$12b. 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 Kansas City Southern’s financial liquidity and leverage to give you an idea of Kansas City Southern’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 KSU here.
KSU’s Debt (And Cash Flows)
KSU’s debt levels surged from US$2.6b to US$2.8b over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$93m , ready to be used for running the business. Moreover, KSU has produced cash from operations of US$1.1b in the last twelve months, resulting in an operating cash to total debt ratio of 38%, signalling that KSU’s debt is appropriately covered by operating cash.
Can KSU pay its short-term liabilities?
Looking at KSU’s US$481m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is the number you get when you divide current assets by current liabilities. For Transportation companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can KSU service its debt comfortably?
With a debt-to-equity ratio of 55%, KSU can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because 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 test if KSU’s debt levels are sustainable by measuring interest payments against earnings of a company. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For KSU, the ratio of 8.67x suggests that interest is well-covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like KSU are considered a risk-averse investment.
KSU’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. Since there is also no concerns around KSU’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how KSU has been performing in the past. I suggest you continue to research Kansas City Southern to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KSU’s future growth? Take a look at our free research report of analyst consensus for KSU’s outlook.
- Valuation: What is KSU 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 KSU 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.