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Celanese’s Free Cash Flow: Can It Help Reduce Its Debts?


Sep. 19 2018, Updated 4:20 p.m. ET

Celanese’s free cash flow

Over the past six years, data indicate that Celanese (CE) has been generating positive free cash flows. However, its free cash flows haven’t been consistent. In that period, CE has generated an average free cash flow of $362 million. At the end of the second quarter of 2018, it generated a free cash flow of $562 million. If that trend continues, CE could post more than $1 billion in free cash flow for fiscal 2018.

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CE’s free cash flows are used to pay dividends. In the past six years, its dividend payment has increased from $42 million in 2012 to $201 million in 2017, up nearly fivefold. On average, CE has paid dividend of ~$148 million, representing ~50% of its average free cash flows. Although CE has ~50% of its free cash flows left, pre-maturing the debt may not be a high priority for the company. On the other hand, we need to see if CE can service its debt comfortably.

Interest coverage ratio

An interest coverage ratio tells us how comfortable a company is in servicing its debt. The ratio is calculated by dividing a company’s EBIT (earnings before interest and tax) by its interest expense. The higher the multiple, the better the company’s position.

At the end of the second quarter of 2018, Celanese’s interest coverage ratio was 11.3x, which is higher than the industry average of 7.8x. Since 2012, its interest coverage ratio has been on an upward trend. Its peers Westlake Chemical (WLK), Olin (OLN), and LyondellBasell (LYB) have interest coverage ratios of 13.3x, 2.6x, and 19.4x, respectively. Although Celanese’s interest coverage ratio is below Westlake Chemical’s and LyondellBasell’s, it’s still above the industry average. Its interest coverage ratio shows that Celanese can service its debt efficiently.

Investors can hold Celanese indirectly by investing in the First Trust Materials AlphaDEX ETF (FXZ). FXZ has invested 2.7% of its portfolio in Celanese as of September 18.


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