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Hormel Foods Corporation (NYSE:HRL), a large-cap worth US$22b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. In times of low liquidity in the market, these firms won’t be left high and dry. They are also relatively unaffected by increases in interest rates. Using the most recent data for HRL, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.
Does HRL Produce Much Cash Relative To Its Debt?
HRL’s debt levels have fallen from US$810m to US$250m over the last 12 months , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at US$646m , ready to be used for running the business. Additionally, HRL has generated cash from operations of US$1.2b in the last twelve months, leading to an operating cash to total debt ratio of 466%, signalling that HRL’s current level of operating cash is high enough to cover debt.
Can HRL pay its short-term liabilities?
Looking at HRL’s US$1.1b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.14x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does HRL face the risk of succumbing to its debt-load?
A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for large-cap stocks is considered as financially healthy, as a rule of thumb. HRL’s level of debt is low relative to its total equity, at 4.2%. This range is considered safe as HRL is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether HRL is able to meet its debt obligations by looking at the net interest coverage ratio. As a rule of thumb, a company should have earnings before interest and tax (EBIT) of at least three times the size of net interest. For HRL, the ratio of 124x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes HRL and other large-cap investments thought to be safe.
HRL’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for HRL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hormel Foods to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for HRL’s future growth? Take a look at our free research report of analyst consensus for HRL’s outlook.
- Valuation: What is HRL 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 HRL 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.