financial analysis of MLPs
July 10, 2009 7:37 AM   Subscribe

What do you consider to be the critical financial ratios for Master Limited Partnerships such as Kinder Morgan, etc.?

Not sure if this type of question will generate good answers in a community like this, but I figured I'd give it a try: what do you think are the critical financial ratios to be examined for Master Limited Partnerships such as Kinder Morgan?

(For those predisposed to assume that this type of question is for schoolwork: no, it is not. I have been out of school for over a decade.)
posted by dfriedman to Work & Money (1 answer total)
Since no one's answered your question yet, I'll give it a shot. I assume you're asking this question as a well-informed potential investor, so I'll approach it from that standpoint.

I'm an advanced accounting student finishing up my final post-baccalaureate class in financial statement analysis, and I had never heard of Master Limited Partnerships until I read your question. (Thanks for giving me a good excuse to look up the info - fascinating!) I know virtually nothing about MLPs except what I learned through a quick Google search, and I'm offering a tentative answer about financial ratios mostly for my own edification, so take what I have to say with the proverbial grain of salt. We've got some awesome finance geeks on MeFi, so hopefully someone more experienced will correct me if I'm off the mark.

That said, keeping in mind the general limitations of financial ratio analysis, it sounds like liquidity, solvency and cash flow would be your main concerns with this type of business. Maybe start with the current ratio (though it can be misleading). Since dividend payouts are contingent on the MLP's ability to generate distributable cash flow, you might want to look at sustainable cash flow from operations and the company's ability to cover current debt and dividends out of that cash flow. Generally speaking, the higher that ratio, the more likely the MLP will be able to cover its current obligations with operating cash, and the better the outlook for you as an investor.

Another possibility, if you want to look at profitability and asset utilization, is return on common equity (return on assets * financing cost ratio * capital structure leverage) and the sustainable growth rate (ROCE * 1 - dividend payout rate). From what I've read, it doesn't sound like you'd need to worry about MLPs being too highly leveraged, though.

That's a start, anyway...
posted by velvet winter at 11:57 PM on July 26, 2009

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