Funds from Operations (FFO) is a higher quality measure of QTS’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For QTS, its FFO of US1m makes up 67% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether QTS has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take QTS to pay off its debt using its income from its main business activities, and gives us an insight into QTS’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take QTS 7.03 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at QTS’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 6.65x, it’s safe to say QTS is generating an appropriate amount of cash from its borrowings.
In terms of valuing QTS, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. QTS’s price-to-FFO is 14.37x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.Top Searches - Trending Searches - New Articles - Top Articles - Trending Articles - Featured Articles - Top Members
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