I like to keep a close eye on the developments of the Internet Software and Services industry. Sometimes, I come across interesting investment options, like Equinix, Inc (NASDAQ:EQIX). Although I take many aspects into account when I analyze a company, I will focus, in this article, on debt and liabilities.
I will look into Equinix Inc's total debt, total liabilities and debt ratios. In addition, I will examine what analysts and other top investors think about this company. This analysis is crucial to understanding the risks of investing in this company and will allow us to appreciate how leveraged a company is and what kind of returns to expect for a long-term investment.
As the years 2008 and 2009 have taught us, leveraged companies with large amounts of debt can have a devastating impact over your investment. However, by taking a close look into the debt scheme of Equinix, Inc, we will be able to elucidate if the company is likely to maintain its capital and use it for future growth.
Total Debt to Total Assets Ratio
This metric is used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It results from adding short-term and long-term debt and then dividing this figure by the company's total assets. If the outcome is higher than 1, it means that a company's total debt surpasses the value of its total assets. Au contraire, a debt ratio smaller than 1 indicates that a company's assets are worth more than its total debt. The total debt to total assets ratio (especially when complemented with other measures of financial health) can come in extremely handy when investors want to determine a company's level of risk.
Equinix Inc's total debt to total assets ratio has been shrinking over the past three years, from 0.54 to 0.49. This means that, since 2010, the company has increased the value of its assets at a faster pace than its debt grew. This certainly proves the management's commitment with reducing debt levels.
As this figure is currently well below 1x (0.49), Equinix Inc faces low financial risk, as it has more assets than total debt.
Debt ratio = Total Liabilities / Total Assets
The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high debt ratio - or that is "highly leveraged" - could be in danger if creditors start to demand repayment of debt.
Over the past three years, Equinix Inc's total liabilities to total assets ratio has experienced a decline, from 0.65 to 0.60, which is usually a good sign, in my view.
However, as the 2013 TTM numbers are above the 0.50 mark, this indicates that Equinix Inc has financed most of its assets through debt. As the number has increased, so has the risk of investing in the company.
Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
Equinix Inc's debt-to-equity ratio has fallen over the past three years. In 2013, it acquired a value of 1.59, compared to 1.92 in 2011. This is an encouraging sign as it shows that the company has ameliorated its balance sheet and risk profile.
The fact that the company´s ratio currently surpasses 1x (1.59) indicates that shareholders have invested more than suppliers, lenders, creditors and obligators, which implies a high risk for the company and its stockholders.
Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky: if they fail to repay their debt on time, jeopardy of insolvency gets high. Companies with an elevated capitalization ratio may also find it difficult to get more loans in the future.
Over the past three years, Equinix Inc's capitalization ratio has decreased from 0.59 to 0.56. This implies that the company has more equity compared to its long-term debt. As this is the case, the company has had more equity to support its operations and add growth through its equity. A decreasing ratio - currently at 0.56 - implies a slight reduction in the company's financial risk (which is, actually, quite low).
Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. It provides an indication of a firm's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
As the ratio stands below 1x, the company does not have the ability to cover its total debt with its yearly cash flow from operations. The idea is finding stocks that have ratios well above 1.
I also evaluate recent institutional activity in the stock. In other words, which hedge funds bought the stock recently.
It is important to know that both Chuck Akre and John Paulson invested in the stock in the past quarter at an average price of $ 182.27. As explained in a blog post, I think that investors should track hedge fund holdings every quarter.
Currently, many analysts have a good outlook for Equinix, Inc. Analysts at Yahoo Finance expect Equinix, Inc to retrieve EPS of $1.64 for FY 2013 and an EPS of $3.79 for FY 2014. Analysts at Bloomberg are estimating Equinix Inc's revenue to be at $2.15B million for FY 2013 and $2.41B million for FY 2014. In 29/07/2010, Oppenheimer gave Equinix, Inc a rating of "Outperform" with a target price of $250.00. A $250.00 price target implies significant upside potential from this point.
Source for data: Yahoo Finance
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.