Are Wilmar International Limited's (SGX:F34) Interest Costs Too High?

Wilmar International Limited (SGX:F34), a large-cap worth US$19.42b, comes to mind for investors seeking a strong and reliable stock investment. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. This article will examine Wilmar International’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. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into F34 here.

See our latest analysis for Wilmar International

How much cash does F34 generate through its operations?

F34 has built up its total debt levels in the last twelve months, from US$17.43b to US$21.39b , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$4.16b for investing into the business. On top of this, F34 has generated US$2.24b in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 10.47%, meaning that F34’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In F34’s case, it is able to generate 0.1x cash from its debt capital.

Can F34 meet its short-term obligations with the cash in hand?

With current liabilities at US$22.18b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. 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 F34’s debt level acceptable?

With total debt exceeding equities, Wilmar International is considered a highly levered company. 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 lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if F34’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For F34, the ratio of 23.42x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes F34 and other large-cap investments thought to be safe.

Next Steps:

At its current level of cash flow coverage, F34 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how F34 has been performing in the past. You should continue to research Wilmar International to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for F34’s future growth? Take a look at our free research report of analyst consensus for F34’s outlook.
2. Valuation: What is F34 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 F34 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.

To help readers see pass 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.