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Is Encana Corporation (TSE:ECA) A Financially Sound Company?

Simply Wall St

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Investors pursuing a solid, dependable stock investment can often be led to Encana Corporation (TSE:ECA), a large-cap worth CA$14b. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, the health of the financials determines whether the company continues to succeed. Today we will look at Encana’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into ECA here.

Check out our latest analysis for Encana

Does ECA Produce Much Cash Relative To Its Debt?

Over the past year, ECA has maintained its debt levels at around US$4.5b – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$1.1b to keep the business going. Moreover, ECA has generated US$2.3b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 51%, meaning that ECA’s current level of operating cash is high enough to cover debt.

Can ECA meet its short-term obligations with the cash in hand?

With current liabilities at US$2.0b, it appears that the company has been able to meet these commitments with a current assets level of US$2.7b, leading to a 1.33x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Oil and Gas companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

TSX:ECA Historical Debt, April 4th 2019

Does ECA face the risk of succumbing to its debt-load?

ECA is a relatively highly levered company with a debt-to-equity of 60%. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether ECA is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For ECA, the ratio of 4.83x suggests that interest is appropriately covered. Strong interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as ECA is a safe investment.

Next Steps:

Although ECA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around ECA's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how ECA has been performing in the past. You should continue to research Encana to get a better picture of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ECA’s future growth? Take a look at our free research report of analyst consensus for ECA’s outlook.
  2. Valuation: What is ECA worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ECA is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.