Although still safe and able to cover its debt over the short- and long-term, there are many indicators that PotashCorp (POT) is in a less advantageous position in terms of debt compared to its peers.
Short term analysis – healthy but could be stronger
The working capital ratio shows how many times current assets could cover current liabilities –Current Assets/Current Liabilities. It shows the ability of a campany to pay its short-term obligations.
Over the past three years, PotashCorp’s working capital ratio has been in a relatively safe position. By the end of 2013, the company seemed able to cover its short-term debt with a ratio of 1.04. Despite adverse market conditions, PotashCorp managed to maintain inventory levels to desirable levels and increase cash by reducing accounts receivables.
Almost all of PotashCorp’s peers have a higher working capital ratio. The average ratio of Mosaic (MOS), Intrepid Potash (IPI), Agrium (AGU) and CF Industries (CF) was of 2.44 by the end of 2013. Internationally, this average decreases to 2.06 (including PotashCorp), but it is still almost twice as large as PotashCorp’s, mainly due to much higher cash holdings such as Mosaic’s (MOS) case. The company seems to be more shareholder friendly in that maintaining itself is just enough.
Over 2014, this ratio is expected to get better because PotashCorp is expected to reduce capital expenditures by large amounts. More will be discussed about this on the next article.
Long term Analysis –no concerns… for now
PotashCorp has net debt of $3.3 billion. Net debt is the sum between long- and short-term debt minus cash and cash equivalents. A negative net debt means that the company has more cash than debt.This number provides investors with many useful ratios such as net debt to total capital. This ratio allows us to understand how much of the company’s assets are funded on debt. 24.3% of PotashCorp’s capital consists of debt; even though this number is close to the north American average of 19.2% (excluding PotashCorp, as well as Mosaic (MOS) due to negative net debt), PotashCorp’s peers are currently functioning with less debt.
Furthermore, the net debt to EBITDA (earnings before interest expense, depreciation, and amortization) ratio help us comprehend how well a company could cover its debts. The lower this ratio is, the less risk the company is taking. PotashCorp currently has a 1.04 net debt to EBITDA ratio. Historically, PotashCorp has been in a riskier position. However; with the turmoil in the industry, many peers have dramatically decrease earnings causing their ratio to increase and surpass PotashCorp’s.
© 2013 Market Realist, Inc.
But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.