Fonterra Co-operative Group Limited (NZSE:FCG): Time For A Financial Health Check

Stocks with market capitalization between $2B and $10B, such as Fonterra Co-operative Group Limited (NZSE:FCG) with a size of NZ$7.1b, do not attract as much attention from the investing community as do the small-caps and large-caps. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. This article will examine FCG’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Don’t forget that this is a general and concentrated examination of Fonterra Co-operative Group’s financial health, so you should conduct further analysis into FCG here.

View our latest analysis for Fonterra Co-operative Group

Does FCG Produce Much Cash Relative To Its Debt?

Over the past year, FCG has ramped up its debt from NZ$6.3b to NZ$6.9b , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at NZ$446m , ready to be used for running the business. On top of this, FCG has generated NZ$1.5b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 22%, meaning that FCG’s current level of operating cash is high enough to cover debt.

Can FCG pay its short-term liabilities?

At the current liabilities level of NZ$5.1b, it appears that the company has been able to meet these commitments with a current assets level of NZ$6.0b, leading to a 1.16x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NZSE:FCG Historical Debt, March 12th 2019
NZSE:FCG Historical Debt, March 12th 2019

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

Since total debt growth have outpaced equity growth, FCG is a highly leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since FCG is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

Although FCG’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 FCG’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure FCG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Fonterra Co-operative Group to get a better picture of the mid-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for FCG’s future growth? Take a look at our free research report of analyst consensus for FCG’s outlook.
  2. Valuation: What is FCG 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 FCG 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.