Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Fonterra Co-operative Group Limited (NZSE:FCG), with a market capitalization of NZ$8.41b, rarely draw their attention from the investing community. Despite this, the two other categories have lagged behind the risk-adjusted returns of commonly ignored mid-cap stocks. 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 out our latest analysis for Fonterra Co-operative Group
Does FCG produce enough cash relative to debt?
FCG has built up its total debt levels in the last twelve months, from NZ$6.76b to NZ$7.62b – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$359.00m , ready to deploy into the business. On top of this, FCG has generated cash from operations of NZ$1.25b during the same period of time, resulting in an operating cash to total debt ratio of 16.42%, meaning that FCG’s operating cash is not 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 0.16x cash from its debt capital.
Does FCG’s liquid assets cover its short-term commitments?
With current liabilities at NZ$6.62b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.28x. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is FCG’s debt level acceptable?
With total debt exceeding equities, FCG is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since FCG is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, FCG has room for improvement to better cushion for events which may require debt repayment. Though, 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 recommend 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.
- Historical Performance: What has FCG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.