Does Saputo Inc.’s (TSE:SAP) Debt Level Pose A Problem?

Saputo Inc. (TSE:SAP), a large-cap worth CA$18b, comes to mind for investors seeking a strong and reliable stock investment. Big corporations are much sought after by risk-averse investors who find diversified revenue streams and strong capital returns attractive. But, its financial health remains the key to continued success. Let’s take a look at Saputo’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into SAP here.

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Does SAP Produce Much Cash Relative To Its Debt?

SAP has built up its total debt levels in the last twelve months, from CA$1.8b to CA$2.5b , which includes long-term debt. With this rise in debt, SAP currently has CA$146m remaining in cash and short-term investments , ready to be used for running the business. Moreover, SAP has produced cash from operations of CA$962m over the same time period, resulting in an operating cash to total debt ratio of 38%, meaning that SAP’s operating cash is sufficient to cover its debt.

Can SAP meet its short-term obligations with the cash in hand?

Looking at SAP’s CA$2.0b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.6x. The current ratio is calculated by dividing current assets by current liabilities. For Food companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

TSX:SAP Historical Debt, May 18th 2019
TSX:SAP Historical Debt, May 18th 2019

Does SAP face the risk of succumbing to its debt-load?

SAP is a relatively highly levered company with a debt-to-equity of 46%. This is common amongst large-cap companies because debt can often be a less expensive alternative to equity due to tax deductibility of interest payments. Accordingly, large companies often have an advantage over small-caps through lower cost of capital due to cheaper financing. 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. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. In SAP’s case, the ratio of 16.88x suggests that interest is comfortably covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as SAP is a safe investment.

Next Steps:

Although SAP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SAP’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how SAP has been performing in the past. I suggest you continue to research Saputo to get a more holistic view of the large-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SAP’s future growth? Take a look at our free research report of analyst consensus for SAP’s outlook.
  2. Valuation: What is SAP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SAP is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.