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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Sanderson Farms, Inc. (NASDAQ:SAFM), with a market cap of US$2.6b, often get neglected by retail investors. 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 SAFM’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 commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into SAFM here.
Can SAFM service its debt comfortably?
What is considered a high debt-to-equity ratio differs depending on the industry, because some industries tend to utilize more debt financing than others. As a rule of thumb, a financially healthy mid-cap should have a ratio less than 40%. For SAFM, the debt-to-equity ratio is zero, meaning that the company has no debt. This means it has been running its business utilising funding from only its equity capital, which is rather impressive. Investors’ risk associated with debt is virtually non-existent with SAFM, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Can SAFM pay its short-term liabilities?
Since Sanderson Farms doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$199m, the company has been able to meet these commitments with a current assets level of US$566m, leading to a 2.85x current account ratio. For Food companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
SAFM has no debt as well as ample cash to cover its near-term liabilities. Its safe operations reduces risk for the company and its investors, however, some level of debt may also ramp up earnings growth and operational efficiency. Keep in mind I haven’t considered other factors such as how SAFM has performed in the past. I suggest you continue to research Sanderson Farms to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SAFM’s future growth? Take a look at our free research report of analyst consensus for SAFM’s outlook.
- Valuation: What is SAFM 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 SAFM 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.
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 email@example.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.