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There are a number of reasons that attract investors towards large-cap companies such as Union Pacific Corporation (NYSE:UNP), with a market cap of US$117b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the key to extending previous success is in the health of the company’s financials. This article will examine Union Pacific’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 UNP here.
Does UNP produce enough cash relative to debt?
UNP’s debt levels surged from US$17b to US$22b over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$1.3b , ready to deploy into the business. Additionally, UNP has produced cash from operations of US$8.7b in the last twelve months, resulting in an operating cash to total debt ratio of 39%, indicating that UNP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In UNP’s case, it is able to generate 0.39x cash from its debt capital.
Can UNP pay its short-term liabilities?
With current liabilities at US$4.6b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.9x.
Is UNP’s debt level acceptable?
Since equity is smaller than total debt levels, Union Pacific 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. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. We can test if UNP’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. In UNP’s case, the ratio of 10.18x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as UNP is a safe investment.
UNP’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 lack of liquidity raises questions over current asset management practices for the large-cap. Keep in mind I haven’t considered other factors such as how UNP has been performing in the past. I recommend you continue to research Union Pacific to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UNP’s future growth? Take a look at our free research report of analyst consensus for UNP’s outlook.
- Valuation: What is UNP 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 UNP 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.
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.