Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like CF Industries Holdings, Inc. (NYSE:CF), with a market cap of US$9.5b, are often out of the spotlight. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. Today we will look at CF’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. Don’t forget that this is a general and concentrated examination of CF Industries Holdings’s financial health, so you should conduct further analysis into CF here.
See our latest analysis for CF Industries Holdings
CF’s Debt (And Cash Flows)
CF’s debt level has been constant at around US$4.7b over the previous year including long-term debt. At this constant level of debt, CF’s cash and short-term investments stands at US$682m to keep the business going. On top of this, CF has generated cash from operations of US$1.5b over the same time period, resulting in an operating cash to total debt ratio of 32%, indicating that CF’s operating cash is sufficient to cover its debt.
Can CF meet its short-term obligations with the cash in hand?
Looking at CF’s US$705m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$1.3b, leading to a 1.81x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CF face the risk of succumbing to its debt-load?
With debt reaching 82% of equity, CF may be thought of as relatively highly levered. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CF’s case, the ratio of 3.17x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although CF’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around CF’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CF has company-specific issues impacting its capital structure decisions. You should continue to research CF Industries Holdings to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CF’s future growth? Take a look at our free research report of analyst consensus for CF’s outlook.
- Valuation: What is CF 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 CF 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 editorial-team@simplywallst.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.