Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Fonterra Co-operative Group Limited (NZSE:FCG), with a market cap of NZ$7.7b, often get neglected by retail investors. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. FCG’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into FCG here.
How does FCG’s operating cash flow stack up against its debt?
FCG’s debt levels surged from NZ$6.3b to NZ$6.9b over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at NZ$446m for investing into the business. Moreover, FCG has produced cash from operations of NZ$1.5b over the same time period, leading to an operating cash to total debt ratio of 22%, indicating that FCG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In FCG’s case, it is able to generate 0.22x cash from its debt capital.
Can FCG meet its short-term obligations with the cash in hand?
With current liabilities at NZ$5.1b, the company has been able to meet these obligations given the level of current assets of NZ$6.0b, with a current ratio of 1.16x. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is FCG’s debt level acceptable?
Since total debt levels have outpaced equities, 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 presently unprofitable, 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.
FCG’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how FCG has been performing in the past. I suggest you continue to research Fonterra Co-operative Group to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 firstname.lastname@example.org.