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

PART:
1 2 3 4 5
Part 2
Taking Stock of W.R. Grace's Leverage Situation after 2Q17 PART 2 OF 5

W.R. Grace’s Interest Coverage Improves: A Good Sign?

W.R. Grace’s interest expense

W.R. Grace’s (GRA) high debt level has resulted in higher interest expenses for the company. At the end of 2Q17, its weighted average interest cost was 4.4% compared to 4.6% at the end of fiscal 2016, resulting in some savings in interest paid. Since 2014, GRA’s interest expense has been on a declining trend, which is a good sign for the company. Its interest expense fell partly because of repayment of debt in 2016.

W.R. Grace&#8217;s Interest Coverage Improves: A Good Sign?

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At the end of 2016, GRA said that an increase in the interest rate by 100 basis points would increase its annual interest expense by $3.1 million. With the Fed already increasing the interest rate twice in 2017, we can expect GRA’s interest expense to be higher for fiscal 2017, provided the debt level remains constant.

Interest coverage ratio

An interest coverage ratio indicates how well a company can service its debt. It’s determined by dividing the company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better it is for the company since it can easily service its debt. At the end of 2Q17, GRA’s interest coverage ratio stood at 4.13x. Its peers Huntsman (HUN), Eastman Chemical (EMN), and Westlake Chemical (WLK) have interest coverage ratios of 4.63x, 5.73x, and 16.17x, respectively.

In 2014, GRA’s interest coverage ratio was 2.80x. It has improved gradually partly because of a reduction in interest expense due to repayment of debt and because GRA’s EBIT has also been improving. This is an encouraging sign for GRA, indicating the company’s improving operating efficiency.

Investors can indirectly hold GRA by investing in the ProShares Ultra Basic Materials (UYM), which has invested 0.50% of its portfolio in GRA.

In the next part, we’ll look at GRA’s valuations compared to its peers.

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