Are FedEx Corporation’s (FDX) Interest Costs Too High?

Large-cap companies such as FedEx Corporation (NYSE:FDX), with a market-capitalization of USD $58.27B, are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns more comforting than explosive growth potential. But another key factor to consider when investing in FDX is its financial health. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. Check out our latest analysis for FedEx

Is FDX’s level of debt at an acceptable level?

Debt-to-equity ratio standards differ between industries, as some some are more capital-intensive than others, meaning they need more capital to carry out core operations. As a rule of thumb, a financially healthy large-cap should have a ratio less than 40%. For FDX, the debt-to-equity ratio is 91.20%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In FDX’s case, its interest is excessively covered by its earnings as the ratio sits at 10.93x. Debtors may be willing to loan the company more money, giving FDX ample headroom to grow its debt facilities.

How does FDX’s operating cash flow stack up against its debt?

A simple way to determine whether the company has put debt into good use is to look at its operating cash flow against its debt obligation. This is also a test for whether FDX has the ability to repay its debt with cash from its business, which is less of a concern for large companies. FDX’s recent operating cash flow was 0.3 times its debt within the past year. A ratio of over a 0.25x is a positive sign and shows that FDX is generating ample cash from its core business, which should increase its potential to pay back near-term debt.

Next Steps:

Are you a shareholder? FDX’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that FDX’s capital structure may be different in the future, I encourage exploring market expectations for FDX’s future growth on our free analysis platform.

Are you a potential investor? Although investors should analyse the serviceability of debt, it shouldn’t be viewed in isolation of other factors. After all, debt financing is an important source of funding for companies seeking to grow through new projects and investments. Therefore, I recommend potential investors to examine FDX’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.