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Cheniere Energy Partners LP (CQP), Texas Industries, Inc. (TXI): These Stocks Are Toxic for Your Portfolio

One of the first things that investors look at when studying a company is the balance sheet. In particular, debt; companies that have high levels of debt relative to equity or EBITDA usually have high interest costs, which can constrict growth, income and shareholder returns.

In addition, high levels of debt can indicate that the company is on its last legs as a sudden cash call could be looming, resulting in a fire-sale of assets and almost no return for investors. There is also a risk to future earnings, as high interest costs can constrict the company’s ability to generate a positive net cash inflow. And, if the company wants additional borrowing to grow, then it may find itself having to pay even higher interest costs; or even worse, the company will be refused access to credit.

So, all in all, it would be wise for investors who wants to safeguard their cash to stay away from companies that have high levels of debt.

Cheniere Energy Partners LP (NYSEMKT:CQP)

These companies look guilty

Texas Industries, Inc. (NYSE:TXI) , Cheniere Energy Partners LP (NYSEMKT:CQP) and Group Inc (NASDAQ:WWWW) all look guilty of having high, unsustainable levels of debt. Indeed, for the most part, these companies are spending almost all of their income paying off interest costs. As interest rates are set to rise in the future, they could be running out of time to repay debt before their debts gets the better of them.

The good

2010 2011 2012
EBITDA $44 $13 $34
Finance Costs -$52 -$48 -$35
Net Debt $464 $536 $570
Net Debt to EBITDA $11 $41 $17

Figures in millions of $ except for ratios

First up is construction-materials supplier, Texas Industries, Inc. (NYSE:TXI). Texas has been struggling to rebuild itself since the housing bubble burst, but debt keeps rising as interest costs are consuming all income. Indeed, the company is having to borrow just to run day-to-day operations, an unsustainable way to run a business.

Texas Industries, Inc. (NYSE:TXI) reported a loss per share of $1.37 last year and the company is working with a tiny operating margin of 1.2%. Moreover, Texas Industries, Inc. (NYSE:TXI) is only producing a 1.4% return on assets an extremely low rate of return for its investors. With these poor returns on assets and debt building rapidly, Texas Industries, Inc. (NYSE:TXI) is a company to avoid for now.

The bad

2010 2011 2012
EBITDA $3 $11 $46
Finance Costs -$3 -$22 -$66
Net Debt $87 $705 $678
Net Debt to EBITDA $29 $64 $15

Figures in millions of $ except for ratios Group Inc (NASDAQ:WWWW)’s net debt has been falling and earnings have been rising over the past three years, but the company is paying almost 200% more in interest than it was during 2011 — on a lower amount of debt. The issue here is that the company is deemed insecure by its creditors, therefore it is being asked to payout more in interest costs.

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