At the end of 1Q17, Praxair’s (PX) debt was ~$9.4 billion, which includes long-term debt, short-term debt, and current maturities of long-term debt. Its history over the past five years suggests that its debt has been on the rise. In 2012, PX debt was ~$7.4 billion, and over a period of five years, it reached ~$9.4 billion, growing at a CAGR (compound annual growth rate) of 5.8%.
Praxair’s debt rose in 2013, primarily due to the issuance of several new notes. It issued new notes worth ~$2.6 billion carrying different coupon rates and different maturities. However, that same year, Praxair redeemed notes worth ~$1.3 billion that had higher coupon rates. Since 2015, its debt has been steady in the range of ~$9.3 billion–$9.5 billion.
Debt-to-equity ratio indicates the proportion of debt being used to finance assets. At the end of 1Q17, Praxair’s debt-to-equity ratio stood at 1.57x, which is well above the industry average of 0.87x. Its peer Air Products & Chemicals’ (APD) debt-to-equity ratio, according to its latest earnings, was 0.41x. That could be a concern for investors since the ratio is almost double the industry average and above its peers, indicating that its debt level might be stretched.
Free cash flow
Praxair’s free cash flow has grown from $594.0 million in 2012 to $1.3 billion in 2016. However, free cash flow is still not strong enough to repay its debt after accounting for cash dividends that are paid to common shareholders and share buybacks. So we can say that the current levels of debt are expected to continue for a while.
You can invest in the iShares US Basic Materials ETF (IYM) to get exposure to Praxair indirectly. IYM has invested 6.4% of its portfolio in PX. The top holdings of the fund include Dow Chemical (DOW) and DuPont (DD) with weights of 12.0% and 11.8%, respectively, as of July 5, 2017.
In the next part, we’ll look at Praxair’s interest expense and its ability to service its debt.