Advertisement
Singapore markets closed
  • Straits Times Index

    3,224.01
    -27.70 (-0.85%)
     
  • Nikkei

    40,369.44
    +201.37 (+0.50%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Bitcoin USD

    69,297.34
    -1,985.77 (-2.79%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • FTSE Bursa Malaysia

    1,536.07
    +5.47 (+0.36%)
     
  • Jakarta Composite Index

    7,288.81
    -21.28 (-0.29%)
     
  • PSE Index

    6,903.53
    +5.36 (+0.08%)
     

Are PPL Corporation’s (NYSE:PPL) Interest Costs Too High?

There are a number of reasons that attract investors towards large-cap companies such as PPL Corporation (NYSE:PPL), with a market cap of US$19.06b. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, the key to their continued success lies in its financial health. I will provide an overview of PPL’s financial liquidity and leverage to give you an idea of PPL’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into PPL here. Check out our latest analysis for PPL

How does PPL’s operating cash flow stack up against its debt?

Over the past year, PPL has ramped up its debt from US$19.36b to US$21.38b – this includes both the current and long-term debt. With this growth in debt, PPL currently has US$485.00m remaining in cash and short-term investments for investing into the business. On top of this, PPL has produced US$2.46b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 11.51%, meaning that PPL’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PPL’s case, it is able to generate 0.12x cash from its debt capital.

Can PPL meet its short-term obligations with the cash in hand?

Looking at PPL’s most recent US$4.02b liabilities, the company has not been able to meet these commitments with a current assets level of US$2.29b, leading to a 0.57x current account ratio. which is under the appropriate industry ratio of 3x.

NYSE:PPL Historical Debt June 21st 18
NYSE:PPL Historical Debt June 21st 18

Is PPL’s debt level acceptable?

Considering PPL’s total debt outweighs its equity, the company is deemed highly levered. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. By measuring how many times PPL’s earnings can cover interest payments, we can evaluate whether its level of debt is sustainable or not. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For PPL, the ratio of 3.43x suggests that interest is appropriately covered. High interest coverage serves as an indication of the safety of a company, which highlights why many large organisations like PPL are considered a risk-averse investment.

Next Steps:

PPL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. This is only a rough assessment of financial health, and I’m sure PPL has company-specific issues impacting its capital structure decisions. You should continue to research PPL to get a better picture of the stock by looking at:

ADVERTISEMENT
  1. Future Outlook: What are well-informed industry analysts predicting for PPL’s future growth? Take a look at our free research report of analyst consensus for PPL’s outlook.

  2. Valuation: What is PPL 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 PPL is currently mispriced by the market.

  3. 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 pass 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.