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Investors seeking to preserve capital in a volatile environment might consider large-cap stocks such as Tyson Foods, Inc. (NYSE:TSN) a safer option. One reason being its ‘too big to fail’ aura which gives it the appearance of a strong and stable investment. But, its financial health remains the key to continued success. Today we will look at Tyson Foods’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions 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 TSN here.
Does TSN produce enough cash relative to debt?
Over the past year, TSN has ramped up its debt from US$9.7b to US$12b , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$401m , ready to deploy into the business. On top of this, TSN has produced US$2.7b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 23%, meaning that TSN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In TSN’s case, it is able to generate 0.23x cash from its debt capital.
Does TSN’s liquid assets cover its short-term commitments?
At the current liabilities level of US$7.4b, the company may not be able to easily meet these obligations given the level of current assets of US$6.3b, with a current ratio of 0.85x.
Does TSN face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 90%, TSN can be considered as an above-average leveraged company. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Consequently, larger-cap organisations tend to enjoy lower cost of capital as a result of easily attained financing, providing an advantage over smaller companies. We can assess the sustainability of TSN’s debt levels to the test by looking at how well interest payments are covered by earnings. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. In TSN’s case, the ratio of 8.69x suggests that interest is appropriately covered. Large-cap investments like TSN are often believed to be a safe investment due to their ability to pump out ample earnings multiple times its interest payments.
TSN’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the large-cap. I admit this is a fairly basic analysis for TSN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tyson Foods to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TSN’s future growth? Take a look at our free research report of analyst consensus for TSN’s outlook.
- Valuation: What is TSN 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 TSN 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. On rare occasion, data errors may occur. Thank you for reading.