How Ashland’s Debt Is Trending
At the end of fiscal 3Q17, Ashland (ASH) reported total debt of $2.8 billion, which includes long-term debt, short-term debt, and current portion of long-term debt. ASH’s financial year is from October 1 to September 30. In the past five years, ASH has reduced its debt from $3.6 billion to $2.8 billion at the end of fiscal 3Q17. This is an encouraging sign, as lower debt reduces ASH’s interest expense and improves its earnings and efficiency.
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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.
ASH’s reduction in debt in the past three years has helped to improve its debt to equity. At the end of fiscal 3Q17, ASH’s debt-to-equity ratio stood at 0.83x. ASH’s peers Westlake Chemical (WLK), Eastman Chemical (EMN), and Huntsman (HUN) have debt-to-equity ratios of 0.91x, 1.43x, and 2.47x, respectively. Also, ASH’s debt-to-equity ratio is better than the industry average of 0.92x.
Free cash flows
Ashland has been generating strong free cash flows in the past five years. Since 2012, ASH’s free cash flow has grown at a CAGR (compound annual growth rate) of 39.6%. However, at the end of fiscal 3Q17, ASH had a negative cash flow of $12 million. At present, ASH doesn’t consider debt reduction its top priority, but it intends to use its free cash flow for capital investment and other financial activities.
Investors can hold Ashland indirectly by investing in the PowerShares DWA Basic Materials Momentum Portfolio (PYZ), which invests 3.3% of its portfolio in Ashland as of September 28, 2017.