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Taking Stock of W.R. Grace's Leverage Situation after 2Q17

PART:
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Taking Stock of W.R. Grace's Leverage Situation after 2Q17 PART 1 OF 5

Can W.R. Grace Continue Efforts to Bring Down Debt?

W.R. Grace’s debt situation

At the end of 2Q17, W.R. Grace’s (GRA) books reflected short-term debt of $86.5 million and long-term debt of $1.5 billion. Put together, its total debt is $1.6 billion. Since 2014, GRA’s debt has shown a declining trend, helping bring down the leverage. At the end of 2014, GRA had outstanding debt of $2.0 billion, and within three years, it has lowered it to its current level.

Can W.R. Grace Continue Efforts to Bring Down Debt?

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GRA’s debt-to-equity

Debt to equity is an indication of the extent of debt used by a company to grow its assets. A higher debt-to-equity ratio indicates that a company has used extensive borrowing to finance its growth. However, the cost of debt can hamper its earnings due to high interest expenses.

At the end of 2Q17, GRA’s debt-to-equity ratio stood at 3.95x. Its peers Huntsman (HUN), Westlake Chemical (WLK), and Eastman Chemical (EMN) have debt-to-equity ratios of 2.47x, 0.91x, and 1.43x, respectively. GRA’s debt-to-equity ratio is higher than its peers, and it’s also higher than the industry average of 0.94x.

Can free cash flow help lower debt?

In 2014 and 2015, GRA had a negative cash flow. In 2016, it managed to generate a positive free cash flow of $150.6 million. At the end of 2Q17, its free cash flow was $81.4 million. Considering that, GRA might need to be more consistent in generating positive free cash flow before it uses its free cash flow to repay its huge outstanding debt. Instead, it might use its free cash flow to drive future growth.

Investors looking to invest in W.R. Grace indirectly can consider the Vanguard Materials ETF (VAW), which has 0.60% of its portfolio in GRA as of September 20, 2017.

In the next part, let’s look at GRA’s interest expense and its ability to service its debt.

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