Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as Norbord Inc (TSE:OSB) with a market-capitalization of CA$4.83b, rarely draw their attention. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Let’s take a look at OSB’s debt concentration and assess their financial liquidity 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 top-level understanding, so I encourage you to look further into OSB here.
Check out our latest analysis for Norbord
How much cash does OSB generate through its operations?
OSB's debt level has been constant at around US$549.0m over the previous year – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$298.0m for investing into the business. On top of this, OSB has generated US$679.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 124%, meaning that OSB’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In OSB’s case, it is able to generate 1.24x cash from its debt capital.
Can OSB meet its short-term obligations with the cash in hand?
Looking at OSB’s most recent US$285.0m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.69x. For Forestry companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can OSB service its debt comfortably?
With a debt-to-equity ratio of 45.5%, OSB can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether OSB is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In OSB's, case, the ratio of 25.71x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving OSB ample headroom to grow its debt facilities.
Next Steps:
OSB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for OSB's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Norbord to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for OSB’s future growth? Take a look at our free research report of analyst consensus for OSB’s outlook.
- Valuation: What is OSB 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 OSB is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.