What does CF Industries Holdings, Inc.'s (NYSE:CF) Balance Sheet Tell Us About Its Future?

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as CF Industries Holdings, Inc. (NYSE:CF), with a market capitalization of US$9.5b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine CF’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. 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.

Check out our latest analysis for CF Industries Holdings

How much cash does CF generate through its operations?

CF's debt levels have fallen from US$5.8b to US$4.7b over the last 12 months , which also accounts for long term debt. With this debt payback, CF's cash and short-term investments stands at US$1.0b , ready to deploy into the business. On top of this, CF has generated US$1.5b in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 31%, meaning that CF’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CF’s case, it is able to generate 0.31x cash from its debt capital.

Can CF pay its short-term liabilities?

Looking at CF’s US$788m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$1.6b, with a current ratio of 2.03x. For Chemicals companies, this ratio is within a sensible range 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 76% of equity, CF may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if CF’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CF, the ratio of 2.59x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

CF’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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. I suggest you continue to research CF Industries Holdings to get a more holistic view of the mid-cap by looking at:

1. 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.
2. 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.
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 past 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.